till v. scs credit corp.: can you 'till' me how to cram

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Article 9

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Till v. SCS Credit Corp.: Can You "Till" Me How to Cram This Till v. SCS Credit Corp.: Can You "Till" Me How to Cram This

Down? The Supreme Court Addresses the Proper Approach to Down? The Supreme Court Addresses the Proper Approach to

Calculating Cram Down Interest Rates Calculating Cram Down Interest Rates

Phillip J. Giese

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Till v. SCS Credit Corp.: Can You"Till" Me How to Cram This Down?

The Supreme Court Addresses theProper Approach to Calculating

Cram Down Interest Rates

I. INTRODUCTIONII. HISTORICAL BACKGROUND OF FEDERAL BANKRUPTCY

LEGISLATION

III. CHAPTER 13 DEBT ADJUSTMENTA. The Advantages and Policy Behind Consumer Debt

Adjustment BankruptcyB. The Evolution of Chapter 13 Debt Adjustment BankruptcyC. The Process of Filing for Chapter 13D. The Debt Adjustment Plan

1. Mandatory Provisions2. Prohibited Provisions3. Optional Provisions

E. Confirmation of the PlanIV. THE CRAM DOWN PROVISION

A. Determining the Value of the CollateralB. Computing the Cram Down Interest Rate

1. The Concept of Present Value2. Methods for Computing the Cram Down Interest Rate

a. The Coerced Loan Approachb. The Cost of Funds Approachc. The Presumptive Contract Rate Approachd. The Formula Rate Approach

V. TILL V. SCS CREDIT CORP

A. FactsB. Procedural History

VI. ANALYSIS OF THE COURT'S DECISION IN TILL V. SCS CREDIT

CORP.A. Justice Stevens's Plurality Opinion

1. Justice Stevens Rejects the Coerced Loan, PresumptiveContract Rate, and Cost of Funds Approaches

2. Justice Stevens Adopts the Formula Approach3. Justice Stevens Criticizes the Dissent

B. Critique of Justice Stevens's Plurality Opinion1. The Formula Rate Limits Judicial Discretion2. The Formula Rate May Undercompensate Secured

Creditors3. Justice Stevens Fails to Address the Issue of the Proper

Risk Adjustment Scale4. The Formula Rate Suffers From the Same Evidentiary

Problems as Many of the Other Cram Down RateApproaches

C. Justice Thomas's Concurring OpinionD. Critique of Justice Thomas's Concurring OpinionE. Justice Scalia's Dissenting Opinion

1. Justice Scalia Adopts the Presumptive Contract RateApproach

2. Justice Scalia Criticizes the Plurality's Decision3. Justice Scalia Criticizes the Formula Rate Approach4. Justice Scalia Criticizes Justice Thomas's

Concurring OpinionF. Critique of Justice Scalia's Dissenting Opinion

VII. THE IMPACT OF TILL V. SCS CREDIT CORP.

A. Is Till Binding Precedent?B. Subsequent Bankruptcy Court DecisionsC. How Will Till Affect Bankruptcy Under Chapter 11 ?D. What Does Till Mean for the Average Consumer Filing for

Chapter 13 Relief?E. What Does Till Mean for the Sub-Prime Lending Markets?F. How Will the Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005 Affect Chapter 13 Filings?VIII. CONCLUSION

I. INTRODUCTION

The number of consumer bankruptcy filings has hit yet another all-timehigh. Since 1980, the number of bankruptcy filings in the United States hasincreased by over 565% to a record number of 1,660,245 in 2003., Evenmore amazing is the fact that consumer bankruptcy accounts for nearly 98%

1. See American Bankruptcy Institute, U.S. Bankruptcy Filings 1980-2003 (Business, Non-Business, Total), http://www.abiworld.org/ContentManagement/ContentDisplay.cfin?ContentID=12324 (last visited Sept. 30, 2005).

[Vol. 33: 133, 2005] Can You "Till" Me How to Cram This Down?PEPPERDINE LAW REVIEW

of all bankruptcy filings. 2 In fact, one out of every seventy-two Americanhouseholds filed for bankruptcy in the twelve-month period ending March2004.'

With the growing prevalence of consumer bankruptcy, many consumersare turning to debt adjustment under Chapter 13 of the Bankruptcy Code("Code").4 Chapter 13 permits individuals with regular income to develop acourt-supervised plan that allows them to repay their debts over an extendedperiod of time.5 Under a Chapter 13 repayment plan, the debtor is requiredto provide for repayment to both secured and non-secured creditors. 6 Withrespect to secured creditors, the Code protects their interests in one of threeways. First, the secured creditor can merely consent to the debtor'sproposed repayment plan.7 Second, the debtor can choose to surrender theproperty that secured the claim.8 Finally, the debtor can force the securedcreditor to retain a lien on the property and accept payments that equal thepresent value of the secured creditor's allowed claim.9 This final option iscommonly referred to as the "cram down" provision because it allows thedebtor to cram a repayment plan down on the creditor. '0

While the Code specifically provides for cram down, it fails to disclosethe proper method by which to calculate the interest rate that the debtorshould pay the secured creditor.1 This ambiguity has sparked a plethora oflitigation that eventually led to the Supreme Court's recent decision in Till v.SCS Credit Corp. 12 While many anticipated a resolution of the issue, thedecision in Till resulted in a 4-1-4 split, with no majority opinion.1 3 Thus,many questions still linger over Till and its application to Chapter 13.14

2. Id.3. American Bankruptcy Institute, Households Per Filing, Rank During the 12-Month Period

Ending March 31, 2004, http://www.abiworld.org/statcharts/HouseRank.htm (last visited Sept. 30,2005).

4. In 2003, over 28% of those consumers who filed for bankruptcy chose reorganization underChapter 13. See Press Release, U.S. Bankr. Courts, Table F-2, Business and NonbusinessBankruptcy Cases Commenced, by Chapter of the Bankruptcy Code, During the 12-Month PeriodEnding December 31, 2003, http://www.uscourts.gov/PressReleases/1203f2.xls (last visited Sept.30, 2005).

5. H.R. REP. No. 95-595, at 118 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6079.6. See generally 11 U.S.C. § 1322 (2000) (describing the contents of a bankruptcy plan). A

secured claim is defined as a "claim held by a creditor who has a lien or a right of setoff against thedebtor's property." BLACK'S LAW DICTIONARY 265 (8th ed. 2004). A creditor holds an unsecuredclaim if there is no lien or right of setoffagainst property held by the debtor. Id.

7. 11 U.S.C. § 1325(a)(5)(A) (2000).8. Il U.S.C. § 1325(a)(5)(C) (2000).9. It U.S.C. § 1325(a)(5)(B) (2000).

10. See Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 956-57 (1997); see also infra notes104-07 and accompanying text (explaining the cram down provision).

11. See II U.S.C. § 1325(a)(5)(B)(ii) (2000).12. 541 U.S. 465 (2004) (plurality opinion).13. Id.14. See discussion infra Part VII.

Additionally, many commentators question Till's impact on Chapter 11,which contains a similar cram down provision.' 5

This note will examine the Court's decision in Till v. SCS Credit Corp.Part II will provide a brief historical background of federal bankruptcylegislation. 16 Part III will examine the policy, evolution, and process ofChapter 13 debt adjustment. 17 Part IV will discuss the cram down provisionand the various methods of computing the cram down rate. 8 Part V willprovide the facts and procedural history of Till.' 9 Part VI will analyze andcritique the plurality, dissenting, and concurring opinions of Till.20 Finally,Part VII will discuss the legal impact of Till and what the case means for theaverage consumer.2'

II. HISTORICAL BACKGROUND OF FEDERAL BANKRUPTCY LEGISLATION

The genesis of federal bankruptcy legislation can be traced back to theConstitution, which grants Congress the power to "establish... uniformLaws on the subject of Bankruptcies., 22 Under this power, Congress passeda handful of formal bankruptcy acts, beginning in the nineteenth centurywith the Bankruptcy Act of 1800,23 and followed by the Bankruptcy Acts of184124 and 1867.25 While these acts attempted to establish permanentfederal bankruptcy legislation, each was repealed not long after itsenactment.26 The reason for this pattern of enactment and repeal may beseen in the impetus that spurred each attempt at forming a uniformbankruptcy system: financial panic.27 Each bankruptcy law lasted only aslong as the financial crisis that sparked its enactment.2 8 It was not until theBankruptcy Act of 1898, which remained in place for eighty years, thatpermanency came to bankruptcy legislation.29

15. See discussion infra Part VII.C.16. See discussion infra Part II.17. See discussion infra Part II1.18. See discussion infra Part IV.19. See discussion infra Part V.20. See discussion infra Part VI.21. See discussion infra Part VII.22. U.S. CONST. art. 1, § 8, cl. 4.23. Bankruptcy Act of 1800, ch. XIX, 2 Stat. 19, 19-36 (1800) (repealed 1803).24. Bankruptcy Act of 1841, ch. IX, 5 Stat. 440, 440-49 (1841) (repealed 1843).25. Bankruptcy Act of 1867, ch. CLXXVI, 14 Stat. 517 (1867) (repealed 1878).26. See supra notes 23-25.27. DAVID A. SKEEL, JR., DEBT'S DOMINION: A HISTORY OF BANKRUPTCY LAW IN AMERICA 24

(2001).28. Id. at 24. For example, the 1800 Act came in the wake of a depression that started in 1793,

yet it was repealed three years later. Id. at 25. The "Panic of 1837" prompted Congress to pass theAct of 1841, which lasted only two years. Id. Finally, the "Panic of 1857" paved the way for theAct of 1867, which lasted for eleven years. Id.

29. Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 AM.BANKR. INST. L. REV. 5, 23 (1995).


Although the 1898 Act enjoyed a long tenure, it was amended severaltimes-most notably by the Chandler Act of 1938.30 Yet these amendmentswere not enough to sustain the 1898 Act, and with a significant increase inbankruptcy filings in the 1960s, the need for bankruptcy reform becameapparent.3 1 In response to this need, Congress created a BankruptcyCommission in 1970 whose purpose was to "study, analyze, evaluate, andrecommend changes to the [1898] Act... in order for such Act to reflectand adequately meet the demands of present technical, financial, andcommercial activities., 32 Three years later, the Commission filed a report 33

that prompted Congress to pass the Bankruptcy Reform Act of 1978. 34

Commonly referred to as the "Code, 35 the 1978 Act has "brought thefull flowering of bankruptcy law in the United States., 36 Despite thesignificant impact it had on establishing the current Bankruptcy Code, the1978 Act has not survived unscathed and has been amended numerous timesby Congress. 37 Yet the 1978 Act has proven resilient, and it-along withCongress's legislative adjustments-survives today as the BankruptcyCode.38

III. CHAPTER 13 DEBT ADJUSTMENT

A. The Advantages and Policy Behind Consumer Debt AdjustmentBankruptcy

Today's Code allows for different types of bankruptcy proceedingsincluding commercial liquidation under Chapter 739 and commercialreorganization under Chapter 11.40 Yet in recent years, consumerbankruptcy has dominated federal bankruptcy proceedings, accounting for

30. Act of June 22, 1938, ch. 575, 52 Stat. 840 (repealed 1978); Tabb, supra note 29, at 23.31. SKEEL,supra note 27, at 131-32.32. Act of July 24, 1970, Pub L. No. 91-354, § l(b), 84 Stat. 468, 468 (1970).33. COMM'N ON THE BANKR. LAWS OF THE U.S., REPORT OF THE COMMISSION ON THE

BANKRUPTCY LAWS OF THE UNITED STATES, H.R. DOC. No. 93-137, pts. I and 11 (1973).34. Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1978) (current version

at 11 U.S.C. §§ 101-1330 (2000)).35. Tabb, supra note 29, at 32 n.232.36. SKEEL, supra note 27, at 131.37. Tabb, supra note 29, at 37 n.266. Professor Tabb believes that bankruptcy legislation since

1978 has been influenced by six factors: (1) Supreme Court and lower court decisions, (2) creditindustry lobbying, (3) the farm crisis of the early 1980s, (4) the use of the bankruptcy court as aforum for complex social issues, (5) the influence of special interests groups, and (6) the sharpincrease of bankruptcy cases since 1978. Id. at 37-38.

38. Tabb, supra note 29, at 33 n.232, 37 n.266.39. See generally 11 U.S.C. §§ 701-784 (2000).40. See generally II U.S.C. §§ 1101-1174 (2000).

nearly 98% of all filings.4 With respect to consumers who have regularincome, two general options are available: straight liquidation under Chapter742 or debt adjustment under Chapter 13. Chapter 7 liquidation offersconsumers a fresh start and a solution to their indebtedness by quicklydischarging their obligation to repay their nonexempt debts." Chapter 13,however, does not provide for liquidation and instead calls for an approvedrepayment plan that is more manageable than the consumer's prebankruptcypayments.4 5 Initially, Chapter 7's liquidation feature may seem to be themore appealing option. Yet Chapter 13 presents a few advantages for bothcreditors and debtors that are lacking in Chapter 7.

First, creditors generally receive more money under a repayment planthan in liquidation.4 6 Second, debtors are allowed to retain assets that mayhave a low resale value but a high replacement cost.47 Third, the debtor'scredit rating is protected because creditors look more favorably on debtorsfollowing a Chapter 13 repayment plan than on those liquidating underChapter 7.48 Finally, because the debtor retains the responsibility ofrepayment, feelings of failure may be avoided and replaced with debtorconfidence.49

The overall purpose of Chapter 13 is to "enable an individual ... todevelop and perform under a plan for the repayment of his debts over anextended period [of time]" and to enable "him to support himself and hisdependents while repaying his creditors at the same time., 50 Thus, theunderlying policy of Chapter 13 is to encourage the repayment of debt ratherthan simply discharging a debtor's obligations."

B. The Evolution of Chapter 13 Debt Adjustment Bankruptcy

While the concept of debt adjustment was explored by Congress in theearly years of bankruptcy legislation,5 2 a permanent debt adjustment

41. See American Bankruptcy Institute, U.S. Bankruptcy Filings 1980-2003 (Business, Non-Business, Total),http://www.abiworld.org/ContentManagement/ContentDisplay.cfm?ContentlD=12324 (last visitedSept. 30, 2005).

42. See generally 11 U.S.C. §§ 701-784 (2000).43. See generally 11 U.S.C. §§ 1301-1330 (2000).44. See 11 U.S.C. § 727(b) (2000). A nonexempt debt is any debt not listed as exempt under 11

U.S.C. § 523 (2000).45. See generally 11 U.S.C. §§ 1301-1330 (2000) (providing for adjustment of debts and setting

forth the requirements for a plan under Chapter 13).

46. See H.R. REP. NO. 95-595, at 118 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6079.47. Hon. Roger M. Whelan et al., Consumer Bankruptcy Reform: Balancing the Equities in

Chapter 13,2 AM. BANKR. INST. L. REv. 165, 166 (1994); see H.R. REP. No. 95-595, at 118 (1978),reprinted in 1978 U.S.C.C.A.N. 5963, 6079.

48. See H.R. REP. NO. 95-595, at 118 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6079.49. Whelan et al., supra note 47, at 166; see H.R. REP. No. 95-595, at 118 (1978), reprinted in

1978 U.S.C.C.A.N. 5963, 6079.

50. H.R. REP. No. 95-595, at 118 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6079.51. See ALAN N. RESNICK, BANKRUPTCY LAW MANUAL § 10.1, at 1079 (5th ed. 2003).

52. See In re Scher, 12 B.R. 258, 261-62 (Bankr. S.D.N.Y. 1981).


provision was not introduced until the Bankruptcy Act of 1898 was amendedby the Chandler Act of 1938,53 which introduced a debt adjustmentprovision as Chapter XIII.54 Chapter XIII was not perfect, however, andoften led to unmanageable debt loads causing individuals to opt for the cleanslate provided under liquidation proceedings.55 An observation of some ofits problems reveals why Chapter XIII was an unpopular choice amongdebtors. First, creditors had the power to veto even the most generous ofplans.5 6 Second, Chapter XIII was available only to those who earnedwages and not to the self-employed. 57 Finally, Chapter XIII left the dooropen for creditors to seek payment from persons who cosigned the debtor'spromissory notes. 58

In an effort to remedy these problems and make consumer repaymentplans more attractive, Congress revamped Chapter XIII with an intention toallow the debtor the freedom to formulate a realistic and manageable planwithout the intervention or approval of creditors. 9 Today, we are left withthe current Chapter 13 which represents a "viable and popular alternativethat should be seriously considered by individuals seeking relief from severefinancial pressures., 6 °

C. The Process of Filing for Chapter 13

The Chapter 13 debt adjustment process can be broken down into fourbasic steps. The first step is to file for relief under Chapter 13.61 Whenrelief is granted, an automatic stay protects debtors and co-debtors from debt

53. Whelan et al., supra note 47, at 166.54. Act of June 22, 1938, ch. 575, 52 Stat. 840 (repealed 1978). Those who drafted the debt

adjustment provision chose to use Roman numerals to label their chapters. See id. The currentCode, however, lists its chapters with Arabic numerals. Thus, references to "Chapter XIII" in thisarticle refer to the Bankruptcy Act of 1898 as amended by the Chandler Act. References to "Chapter13" refer to the current Bankruptcy Act of 1978.

55. Whelan et al., supra note 47, at 166.56. See Act of June 22, 1938, ch. 575, §§ 651, 652(1), 52 Stat. 934 (repealed 1978); see also

RESNICK, supra note 51, § 10.1, at 1079-80. This requirement of creditor acceptance was seen as thereason for the downfall of most Chapter XIII filings. See In re Scher, 12 B.R. at 265.

57. See Act of June 22, 1938, ch. 575, § 606(3), 52 Stat. 930 (repealed 1978); RESNICK, supranote 51, § 10.1, at 1080.

58. RESNICK, supra note 51, § 10.1, at 1080.59. H.R. REP. No. 95-595, at 123 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6084.60. RESNICK, supra note 51, § 10.1, at 1080.61. 11 U.S.C. §§ 301, 302 (2000). It is important to note that Chapter 13 filings are voluntary

and a debtor cannot be forced into an involuntary debt adjustment plan. 11 U.S.C. §§ 301-03 (2000).The reason for insisting on voluntary filings under Chapter 13 is to avoid the possibility ofunconstitutional involuntary servitude. U.S. CONST. amend. XIII, § 1; H.R. REP. No. 95-595, at 120-21 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6080-82. The procedural requirements for filing aChapter 13 case are very similar to those requirements under Chapters 7 and II and are governedunder Chapter 3. 11 U.S.C. §§ 103(a), 301-66 (2000); RESNICK, supra note 51, § 10.5, at 1091.

139

collection and lien enforcement. 62 The second step is for the debtor toformulate and file a plan for repayment.63 The third step takes the form of aconfirmation hearing held in court to determine whether the plan isappropriate. 64 Finally, when the plan is confirmed by the court it becomesbinding on both the debtor and the creditor, and the debtor begins to makepayments pursuant to the plan.65

D. The Debt Adjustment Plan

At the core of Chapter 13 is the debt adjustment plan, which determineshow debtors will repay creditors.66 Unique to Chapter 13 is the right of thedebtor to make the sole determination of the contents of the proposed plan.67Although the debtor maintains substantial control over the plan, theBankruptcy Code provides requirements and guidance for formulating aplan. These guidelines are outlined in § 1322 of the Bankruptcy Code whichcontains mandatory, prohibited, and optional provisions.68

1. Mandatory Provisions

The first mandatory provision that must be included in the plan calls forthe "submission of all or such portion of future earnings or other futureincome of the debtor to the supervision and control of the trustee as isnecessary for the execution of the plan., 69 This means that the debtor mustturn over to the trustee an amount of future earnings sufficient to satisfy therepayment plan.7° Whatever money is left after this submission remains inthe debtor's hands for his or her personal support.7' While a Chapter 13plan may be drafted so that the debtor can take advantage of making periodicpayments to certain creditors, it also allows a debtor to liquidate a portion ofhis assets in order to satisfy other creditors.72 Thus, Chapter 13 allows thedebtor the flexibility of choosing a middle ground between repayment andliquidation.

The second mandatory provision requires the debtor to "provide for thefull payment, in deferred cash payments, of all claims entitled to priority

62. 11 U.S.C. §§ 362, 1301 (2000). This automatic stay provides debtors with relief from thepressures of creditors and lasts at least until the debt adjustment plan is confirmed and may continuebeyond confirmation. RESNICK, supra note 51, § 10.6, at 1092.

63. 11 U.S.C. § 1321 (2000). Once filed, a plan may be modified at any time prior to itsconfirmation as long as it complies with the requirements of § 1322. 11. U.S.C. § 1323(a) (2000).

64. 11 U.S.C. § 1324 (2000).65. 11 U.S.C. § 1327 (2000).66. See generally 11 U.S.C. §§ 1322, 1325 (2000) (outlining the contents and confirmation of a

debt adjustment plan).67. See RESNICK, supra note 51, §10.15, at 1115 (citing H.R. REP. No. 95-595, at 123 (1978),

reprinted in 1978 U.S.C.C.A.N. 5963, 6084).68. 11 U.S.C. § 1322 (2000); see infra Part III.D.l-3.69. 11 U.S.C. § 1322(a)(1) (2000).70. See id.71. SeeRESNICK, supra note 51, § 10.16, at 1116.72. I1 U.S.C. § 1322(b)(8) (2000).


under section 507" of the Code. 7 Section 507 includes such claims asadministrative expenses related to bankruptcy proceedings,74 alimony, 75 andcertain state and federal taxes.76 Although any creditor who has a § 507priority claim has the right to full payment, the creditor may agree to havethat claim treated differently as a non-priority claim.77

The final mandatory provision requires that "if the plan classifiesclaims, [it must] provide the same treatment for each claim within aparticular class."78 Each class as a whole, however, may be treateddifferently as long as that treatment is fair. 7

2. Prohibited Provisions

While the Bankruptcy Code requires certain provisions to be included inthe plan, it expressly forbids two others. 80 First, "[t]he plan may not providefor payments over a period that is longer than three years, unless the court,for cause, approves a longer period."'" This longer period may not exceedfive years and, again, it must be approved by a court.82 Second, a plancannot modify the rights of holders of "a claim secured only by a securityinterest in real property that is the debtor's principal residence. 83

3. Optional Provisions

Although Chapter 13 mandates that certain provisions be included in theplan while at the same time prohibiting others, the debtor is allowed thefreedom to tailor the plan to meet specific needs.84 To facilitate thisflexibility, § 1322 of the Code lists nine optional provisions that a debtormay include in the plan.85 This list, however, is not exclusive and a plan

73. 11 U.S.C. § 1322(a)(2) (2000).74. 11 U.S.C. § 507(a)(1) (2000).75. 11 U.S.C. § 507(a)(7) (2000).76. 11 U.S.C. § 507(a)(8) (2000). Other § 507 priority claims that must be paid in full include

the following: certain wages or commissions; certain contributions to an employee benefit plan;certain claims made by farmers or fisherman; certain deposits paid in connection with the sale, lease,or rental of property or personal, family, or household services; and certain commitments to a federaldepository institution. See II U.S.C. § 507(a)(3)-(6), (9) (2000).

77. 11 U.S.C. § 1322(a)(2) (2000).78. 11 U.S.C. § 1322(a)(3) (2000).79. See 11 U.S.C. § 1322(b)(1) (2000); RESNICK, supra note 51, § 10.18, at 1123.80. SeeRESNICK, supra note 51, § 10.16, at 1117-19.81. 11 U.S.C. § 1322(d) (2000).82. Id.83. 11 U.S.C. § 1322(b)(2) (2000).84. See infra notes 85-86 and accompanying text.85. See 11 U.S.C. § 1322(b)(1)-(9) (2000). For example, a plan may include a provision "for the

curing or waiving of any default." 11 U.S.C. § 1322(b)(3) (2000). Also, a plan may provide for theconcurrent payment of both secured and unsecured debts. II U.S.C. § 1322(b)(4) (2000).

may "include any other appropriate provision not inconsistent with" theCode. 16

E. Confirmation of the Plan

Once the debtor has drafted a repayment plan, a court is required to holda confirmation hearing where creditors have the opportunity to object to thedebt adjustment plan.17 If the plan is filed in good faith8

' and meets certainrequirements,89 then the court must confirm the plan, making it binding onthe debtor and the creditors involved. 90

Along with these essentials, additional requirements must be metdepending on the nature of the creditor involved. A distinguishing factoramong creditors is whether they hold a secured or unsecured91 claim. 92

With respect to unsecured claims, a creditor is protected, because the "value[of the claim], as of the effective date of the plan," must not be "less than theamount that would be paid on such claim if the estate of the debtor wereliquidated under chapter 7.''93 This means that debtors are required to payunsecured creditors at least as much as they would receive under liquidation.Under this approach, creditors are protected and debtors have the flexibilityto tailor a feasible plan that will increase their chances of success.9 4 If,however, the unsecured creditor objects to the plan, the court is not required

86. 11 U.S.C. § 1322(b)(10) (2000).87. 11 U.S.C. § 1324 (2000). Even if there is no objection to the plan, the court may still have a

duty to ensure that the plan complies with the Code. RESNICK, supra note 51, § 10.28, at 1133 n.l(citing In re Harris, 62 B.R. 931 (Bankr. E.D. Mich. 1986); In re Cash, 51 B.R. 927, 930 (Bankr.N.D. Ala. 1985) ("Neither by statute nor by rule is the bankruptcy judge directed to confirm achapter 13 plan simply because no party in interest objected to confirmation of the plan"); In reBowles, 48 B.R. 502, 505 (Bankr. E.D. Va. 1985) ("[T]he Court is under an independent duty toverify that the plan does in fact comply with the law irrespective of the lack of objection by creditorsor the Chapter 13 trustee.")).

88. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, §102(g), 119 Stat. 23 (to be codified at 11 U.S.C. § 1325(a)(7)). The 2005 Act and its additionalgood-faith requirement became effective on October 17, 2005. See Jonathan D. Epstein, The RushTo File Bankruptcy Rule Will Be Stricter Beginning Oct. 17, BUFF. NEWS, May 15, 2005, at B7.

89. These requirements include full compliance with the Bankruptcy Code, payment of certainfees, and proposal of the plan in good faith and without engaging in illegal activity. 11 U.S.C. §1325(a)(1)-(3) (2000). Perhaps the most important of these requirements is ensuring that "the debtorwill be able to make all payments under the plan and to comply with the plan." 11 U.S.C. §1325(a)(6) (2000). This includes factoring in the debtor's ability to support himself or herself aswell as any family members. H.R. REP. No. 95-595, at 124 (1978), reprinted in 1978 U.S.C.C.A.N.5963, 6085 ("The court will necessarily be required to consider the debtor's ability to meet hisprimary obligation to support his dependents, because otherwise the plan is unlikely to succeed.").

90. 11 U.S.C. §§ 1325(a), 1327(a) (2000).91. A secured claim is defined as a "claim held by a creditor who has a lien or a fight of setoff

against the debtor's property." BLACK'S LAW DICTIONARY 265 (8th ed. 2004). A creditor holds anunsecured claim if there is no lien or right of setoff against property held by the debtor. Id.

92. See 11 U.S.C. § 1325(a)(4)-(5), (b)(l) (2000). The Code provides a broad definition of aclaim which can include any "right to payment, whether or not such right is reduced to judgment,liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,equitable, secured, or unsecured .... 11 U.S.C. § 101(5) (2000).

93. 11 U.S.C. § 1325(a)(4) (2000).94. H.R. REP. No. 95-595, at 123 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6084.


to confirm the plan unless either (1) the plan calls for a distribution ofproperty to the creditor that is at least equal to the amount of the claim, or(2) the plan requires that all of the debtor's disposable income 9 for the nextthree years be used to make payments under the plan. 96

Regarding secured claims, 97 a debtor has three options whenformulating its debt adjustment plan.98 First, a debtor can try to get thesecured creditor to accept the plan. 99 Second, a debtor may hand over theproperty, thereby releasing itself from the creditor's secured claim.' 00 Thedebtor's third and final option is to keep the property over the objection ofthe creditor and draft a plan that allows the creditor to retain the lien' ° ' onthe property while at the same time providing for deferred payments, thepresent value of which

95. The term "disposable income" is defined in the Code and refers to the excess of income afterthe debtor makes reasonable expenditures for (1) "the maintenance or support of the debtor or adependent of the debtor, including charitable contributions ... in an amount not to exceed 15 percentof the gross income of the debtor" and (2) payments "necessary for the continuation, preservation,and operation" of a business. II U.S.C. § 1325(b)(2)(A)-(B) (2000). The reasonableness ofexpenses is a question of fact to be determined by the court while considering the specific context ofthe individual debtor and his or her dependents. 2 KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY §165.1, at 165-1 (3d ed. 2000 & Supp. 2002).

96. 11 U.S.C. § 1325(b)(I)(A)-(B) (2000). It is important to note that the Code uses the word"may" and not "shall" when referring to whether the court should approve the plan. Id. This impliesthat this aspect of confirmation is within the bankruptcy court's discretion and not mandatory. SeeRESNICK, supra note 51, § 10.35, at 1148 n.3 (citing In re Otero, 48 B.R. 704, 708 (Bankr. E.D. Va.1985)); 2 LUNDIN, supra note 95, § 163.1, at 163-3.

97. According to the Bankruptcy Code, the creditor's allowed secured claim is limited to thevalue of the debtor's property that is securing the claim. 11 U.S.C. § 506(a) (2000).

An allowed claim of a creditor secured by a lien on property in which the estate has aninterest.., is a secured claim to the extent of the value of such creditor's interest in theestate's interest in such property ... and is an unsecured claim to the extent that the valueof such creditor's interest ... is less than the amount of such allowed claim.

Id. For example, if a creditor owns a $10,000 claim that is secured by property worth $8,000, the$8,000 portion will be treated as a secured claim and the $2,000 difference will treated as unsecured.Id.

98. Till v. SCS Credit Corp., 541 U.S. 465, 468 (2004) (plurality opinion).99. 11 U.S.C. § 1325(a)(5)(A) (2000). Although creditors generally will only accept a plan that

protects their interests, the burden of legal action may influence creditors to accept a less-than-idealplan. Hon. John K. Pearson et. al., Ending the Judicial Snipe Hunt: The Search for the CramdownInterest Rate, 4 AM. BANKR. INST. L. REV. 35, 49 (1996) ("[L]enders try to avoid legal action sinceit consumes their own resources as well as the debtor's, which may further damage the lender'sclaim.").

100. 11 U.S.C. § 1325(a)(5)(C) (2000); In re Till, 301 F.3d 583, 588 (7th Cir. 2002), rev'd, 541U.S. 465 (2004) ("If the creditor receives the collateral, then its rights under state law are vindicatedand its contract with the debtor is fulfilled .... ). If the property is worth less than the amount ofthe claim "[t]he creditor may still seek the unsecured portion of its claim in bankruptcy, but itproceeds as an unsecured creditor and without the preference the Code gives to secured creditors."Id.

101. The reason for allowing the creditor to retain a lien "is to protect the holder.., from lossoccasioned by a failure on the part of the debtor to complete the proposed plan." 8 COLLIER ONBANKRUPTCY 1325.06[3][a], at 1325-28 (Alan N. Resnick et al. eds., 15th ed. rev. 2005).

143

"is not less than the allowed amount of such claim."' 10 2 This third option iscommonly referred to as the "cram down" provision. 103

IV. THE CRAM DOWN PROVISION

Although the words "cram down" do not appear in § 1325(a)(5)(B)(ii),this provision allows a court to approve a plan that allows the debtor to keepthe property that secures the creditor's claim and force the creditor to accepta modification of its rights.1 °4 For example, in Till v. SCS Credit Corp.,'0 5

the Tills came up with a plan which allowed them to keep their truck andwhich forced SCS to accept a repayment plan with a lesser interest rate thanunder the original terms of the loan. 10 6 Thus, the Tills were able to cramdown a new repayment plan over the objection of SCS. In this way, thecram down provision makes debt adjustment a more feasible option for theconsumer debtor because it prevents the objection of a single creditor fromhalting the confirmation of the repayment plan. 107

The structure of each cram down case can be divided into two basicsteps. First, the value of the collateral0 8 securing the creditor's claim mustbe determined.' 09 Second, the proper interest rate on the deferred paymentsmust be calculated in a manner that protects the present value of the securedcreditor's claim. "10

102. 11 U.S.C. § 1325(a)(5)(B)(ii) (2000); Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 956n.1 (1997). The text of§ 1325(a)(5) reads as follows:

(a) Except as provided in subsection (b), the court shall confirm a plan if-... (5) with respect to each allowed secured claim provided for by the plan-

(A) the holder of such claim has accepted the plan;(B)(i) the plan provides that the holder of such claim retain the lien securing such claim;and (ii) the value, as of the effective date of the plan, of property to be distributed underthe plan on account of such claim is not less than the allowed amount of such claim; or(C) the debtor surrenders the property securing such claim to such holder...

II U.S.C. § 1325(a)(5) (2000).103. Rash, 520 U.S. at 956-57; Till, 541 U.S. at 468-69 (plurality opinion).104. 11 U.S.C. § 1322(b)(2) (2000); David G. Epstein, Don't Go and Do Something Rash About

Cram Down Interest Rates, 49 ALA. L. REV. 435, 437 (1998). There is one important exception tothe cram down power. If the property securing the creditor's claim is real property and is thedebtor's principal residence, then a debt adjustment plan cannot modify the rights of the creditor. 11U.S.C. § 1322(b)(2). The cram down power may be used in all other cases where a secured claim isinvolved. Id.

105. 541 U.S. 465, 469-73 (2004) (plurality opinion).106. Id.107. Jacob D. Krawitz, Comment, Till v. SCS Credit Corp. (In re Till): A Rash Conclusion?, 23

ANN. REV. BANKING & FIN. L. 889, 894 (2004).108. The term "collateral" refers to the "[p]roperty that is pledged as security against a debt; the

property subject to a security interest." BLACK'S LAW DICTIONARY 278 (8th ed. 2004)109. Todd J. Zywicki, Cramdown and the Code: Calculating Cramdown Interest Rates Under the

Bankruptcy Code, 19 T. MARSHALL L. REV. 241, 243 (1994).110. Id.


A. Determining the Value of the Collateral

In Associates Commercial Corp. v. Rash,"' the Supreme Courtaddressed the issue of how to value collateral involved in a Chapter 13 cramdown proceeding." 2 In that case, the Court was faced with the question ofwhether the value should be determined (1) by the amount of proceeds thecreditor could get through a foreclosure sale, or (2) by the cost ofcomparable replacement property. "3

In Rash, the debtor, Elray Rash, purchased a tractor truck using a loanlater assigned to Associates Commercial Association ("Associates"), acreditor who also held a lien on Mr. Rash's truck." 4 Three years afterpurchasing the truck, Mr. Rash and his wife filed a joint petition for Chapter13 relief.'1 5 The Rashs' repayment plan invoked the cram down provisionof § 1325(a)(5)(B)(ii) and provided for payments equaling the value of thenet foreclosure proceeds. 116 Associates objected and claimed that the properamount of payments should equal the cost of a replacement vehicle. " 7

In an eight-to-one decision, the Court agreed with Associates and heldthat "the value of property retained because the debtor has exercised the...'cram down' option is the cost the debtor would incur to obtain a likeasset." ' 8 Thus under the Court's holding in Rash, it is the replacementvalue of property-not the foreclosure value-that serves as the basis forcalculating interest rates under the cram down provision.' 9 Although theCourt was able to come to this conclusion, it left "to bankruptcy courts, astriers of fact, identification of the best way of ascertaining replacement valueon the basis of the evidence presented." 20

111. 520 U.S. 953 (1997).112. See id.113. See id. at 955.114. Id. at 956. The purchase price of the truck at the time of sale was $73,700. Id.115. Id. at 957.116. Id. at 957. The Rashes had an expert value the net foreclosure proceeds at $31,875. Id. This

number represented the amount of money that Associates would have realized if it had repossessedand sold the Rashes' truck. Id.

117. Id. Associates' own expert valued this amount at $41,000. Id.118. Id. at 965.119. Id. It is important to note that the Rash case deals only with the correct valuation of the

collateral at the effective date of the plan and not the method for valuing the deferred payments, i.e.,the cram down interest rate which is the focus of the Till case. See Epstein, supra note 104, at 460.

120. Rash, 520 U.S. at 956 n.6 ("Whether replacement value is the equivalent of retail value,wholesale value, or some other value will depend on the type of debtor and the nature of theproperty."). Interestingly, the holding in Rash has since been codified by Congress in theBankruptcy Abuse Prevention and Consumer Protection Act of 2005. See Bankruptcy AbusePrevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, § 327, 119 Stat. 23 (to becodified at 11 U.S.C. § 506(a)(2)). Following Rash, the 2005 Act sets the value of collateral at thereplacement value at the time of filing for Chapter 13 relief. Id. In addition, the 2005 Act mandatesthat the replacement value for property acquired for personal, family, or household purposes bedetermined by the price that a retail merchant would charge for such property. Id.

B. Computing the Cram Down Interest Rate

1. The Concept of Present Value

Once the value of the collateral is determined, the next step is todetermine the proper method for computing the cram down interest rate.The cram down provision of Chapter 13 calls for the bankruptcy court toexamine "the value, as of the effective date of the plan, of [the] property tobe distributed under the plan. 121 Essentially, this means that the court mustdetermine the present value of the payments to be made under the plan. 122

The term "present value" refers to the time value of money, 123 a conceptCongress specifically intended to be examined under debt adjustmentplans. 124 The gist of this concept is that money in hand today is worth morethan the same amount of money paid in the future. '25

In the context of the cram down provision, the present valuerequirement was designed to place the creditor in the same economicposition as if the collateral was liquidated and the creditor had the benefit ofthe proceeds. 126 To accomplish this goal, a rate of interest must be appliedto the payments called for under the proposed plan. 2 7 Thus, "[t]he courtmust arrive at an appropriate discount factor so as to fairly discount valueproposed to be given in the future on account of the allowed securedclaim." 128

2. Methods for Computing the Cram Down Interest Rate

Although the Code impliedly calls for the application of an appropriatediscount or interest rate, 129 it does not state what method of calculationshould be used. 3 0 Federal courts of appeal that have addressed this issue

121. 11 U.S.C. § 1325(a)(5)(B)(ii) (2000).122. 7 COLLIER ON BANKRUPTCY 1129.06[l][a], at 1129-160 (Alan N. Resnick et al. eds., 15th

ed. rev. 2005).123. Id.124. H.R. REP. No. 95-595, at 413 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6369.125. 7 COLLIER ON BANKRUPTCY, supra note 122, 1 1129.06[1][a], at 1129-160. The basic

formula for computing present value is PV = P/(I+I)N, where P equals the future amount, I is theinterest rate, and N is the number of periods. Id. at n.4. For example, to find the present value of$1,000 payable in three years at an interest rate of 10%, you would divide $ 1,000 by 1.1 raised to thethird power (or 1.331). Id. This would leave you with a present value of $751.31.

126. 8 COLLIER ON BANKRUPTCY, supra note 101, 1325.06[3][b][iii][B], at 1325-34 ("Throughthe payment of interest, the creditor is compensated for the delay in receiving the amount of theallowed secured claim, which would be received in full immediately upon confirmation if thecollateral were liquidated.").

127. See H.R. REP. No. 95-595, at 124 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6085 ("Thebill requires the court to value the secured creditor's interest.").

128. 8 COLLIER ON BANKRUPTCY, supra note 101, 1325.06[3][b][iii][B], at 1325-34.129. See 11 U.S.C. § 1325(a)(5)(B)(ii) (2000).130. See Till v. SCS Credit Corp., 541 U.S. 465, 473 (2004) (plurality opinion) ("The Bankruptcy

Code provides little guidance as to which of the rates of interest... Congress had in mind when itadopted the cram down provision.").


seem to agree that "the rate should compensate the creditor for its delay inreceiving the value of the collateral." 13' Most courts also agree that a"market rate" should be used to compute cram down interest rates. 132 Intheory, a market rate consists of "a composite of rates determined in armslength negotiations between buyers and sellers of funds in moneymarkets."' 3 1 Yet, in spite of this harmony, courts have not been able toagree on a market rate method and "have developed divergent formulae forcalculating the interest rate."'31 4 Indeed, "[t]he market rate requirement,judicially imposed upon present value analysis required by the Code, is soelastic that it provides no guidance to the courts."' 3 5

Despite this confusion, courts have considered various methods forcomputing the cram down rate and have developed four leading approaches:(1) the coerced loan rate, (2) the cost of funds rate, (3) the presumptivecontract rate, and (4) the formula rate. ' 3 6

a. The Coerced Loan Approach

Under the coerced loan method, "[c]ourts... conceptualize the cramdown provision as forcing creditors to extend a new line of credit to thedebtor." 13 7 This approach allows a creditor to get a rate of interest equal towhat it could have received had it foreclosed and used the proceeds to makenew loans similar in duration and risk. 3 8 Following this logic, courts mustfind an interest rate that places the creditor "in an economic positionequivalent to the one it would have occupied had it received the allowedsecured amount immediately, thus terminating the relationship between thecreditor and the debtor."' 3 9

131. In re Till, 301 F.3d 583, 589 (7th Cir. 2002), rev'd, 541 U.S. 465 (2004) (citing Koopmans v.Farm Credit Servs. of Mid-Am. ACA, 102 F.3d 874, 874 (7th Cir. 1996); In re Smithwick, 121 F.3d211, 214 (5th Cir. 1997); Gen. Motors Acceptance Corp. v. Valenti (In re Valenti), 105 F.3d 55, 59-60 (2d Cir. 1997), abrogated on other grounds by Assocs. Commercial Corp. v. Rash, 520 U.S. 953(1997); Gen. Motors Acceptance Corp. v. Jones, 999 F.2d 63, 66-67 (3d Cir. 1993); United CarolinaBank v. Hall, 993 F.2d 1126, 1129-30 (4th Cir. 1993); In re Fowler, 903 F.2d 694, 696-97 (9th Cir.1990); In re Hardzog, 901 F.2d 858, 859-60 (10th Cir. 1990); United States v. Arnold, 878 F.2d 925,928-29 (6th Cir. 1989)).

132. See Pearson et al., supra note 99, at 40-41.133. Thomas 0. Depperschmidt, Choosing the Proper Interest Rate in Bankruptcy Proceedings:

Resolution of Special Issues in the Sixth, Eighth, and Ninth Circuits, 18 N. KY. L. REV. 457, 471(1991). In other words, the market rate is the "going rate" of interest. Id.

134. In re Till, 301 F.3d at 589.135. Pearson et al., supra note 99, at 43 (citing In re River Village Assocs., 161 B.R. 127 (Bankr.

E.D. Pa. 1993)); Waltraud S. Scott, Comment, Deferred Cash Payments to Secured Creditors inCram Down of Chapter 11 Plans: A Matter of Interest, 63 WASH. L. REV. 1041 (1988)).

136. See infra Part IV.B.2.a-d.137. In re Till, 301 F.3d at 591.138. Koopmans v. Farm Credit Servs. of Mid-Am., 102 F.3d 874, 875 (7th Cir. 1996).139. Gen. Motors Acceptance Corp. v. Jones, 999 F.2d 63, 66-67 (3d Cir. 1993).

While the coerced loan method may appear attractive, it is not withoutits faults. Critics of the coerced loan approach argue that it is too subjectiveand causes courts to rely on their intuition rather than on objectiveprinciples. 140 This is because there is no market for these types of coercedloans that courts can look to when setting a cram down rate. 141 As one judgehas stated, "it is difficult to arrive at a current market rate of interest for ahypothetical new loan when there is no market for the loan proposed, noequity in the property and limited opportunity on the part of the debtor toobtain financing outside of the Bankruptcy Code framework." 142

Because bankruptcy courts lack a reference point upon which to base acram down rate, they must instead turn to the testimony of expertwitnesses. 143 Experts, however, do little to provide the court with theinformation necessary to make an objective decision because they mustresort to formulating "a rate that a hypothetical lender would charge to ahypothetical debtor with the same characteristics for the coerced loan inquestion."' 44 Relying on expert testimony presents another problem in thatthe experts for the creditor will generally testify that no lender would loanfunds as called for under the debt adjustment plan. 145 This undermines thecram down provision because it gives the creditor the power to veto anyproposed plan. 146

Additionally, the coerced loan method may improperly include a profitelement into the cram down rate. 147 Critics assert that the inclusion of profitis improper because the purpose of the cram down provision is "to put thecreditor in the same economic position that it would have been in had itreceived the value of its allowed claim immediately. The purpose is not to

140. Monica Hartman, Comment, Selecting the Correct Cramdown Interest Rate in Chapter 11and Chapter 13 Bankruptcies, 47 UCLA L. REV. 521, 536 (1999); Pearson et al., supra note 99, at45 (citing Zywicki, supra note 109, at 257-58).

141. Pearson et al., supra note 99, at 47.142. In re Jordan, 130 B.R. 185, 189 (Bankr. D.N.J. 1991).143. Pearson et al., supra note 99, at 47.144. Id. at 48 (citing Jack Friedman, What Courts Do to Secured Creditors in Chapter 1l Cram

Down, 14 CARDoZO L. REv. 1495, 1519 (1993)).145. Pearson et al., supra note 99, at 48.146. Id.; see also In re River Village Assocs., 161 B.R. 127, 138 (Bankr. E.D. Pa. 1993), afid,

181 B.R. 795 (E.D. Pa. 1995).[T]he secured creditor could.., present expert testimony that no lender would make aloan which is comparable to the treatment of the creditor under the terms of the plan. Theexpert would then propose some high interest rate that a lender would require if it were tomake such a loan. It is likely that the proposed rates, representing a loan which the lenderwould not be prepared to make, would be high enough to render the debtor's planinfeasible. If the court accepted this expert testimony, the court could not cram down theproposed plan. This turn of events would significantly reduce the debtor's chances ofreorganizing, and unfairly increase the secured creditor's bargaining power during theplan negotiation process.

Id. (citing In re Oaks Partners Ltd., 135 BR. 440, 445 (Bankr. N.D. Ga. 1991)).147. Matthew Y. Harris, Comment, Chapter 13 Cram Down Interest Rates: Another Day, Another

Dollar-A Cry For Help in Ending the Quest for the Appropriate Rate, 67 Miss. L.J. 567, 574(1997).


put the creditor in the same position that it would have been in had itarranged a 'new' loan."' 148

b. The Cost of Funds Approach

The cost of funds method sets the cram down interest rate at the "ratethe creditor would have to pay to borrow the amount equal to the collateral'svalue." 49 Therefore, the focus shifts onto the creditor to determine whatinterest rate it must pay when borrowing money. 50 The cost of funds ratedoes not include transaction costs nor does it provide for a profit to thecreditor.' 5' Thus, "[t]he creditor is entitled only to the time value of itsmoney, not what it could receive in a hypothetical new loan to thedebtor." 15 2

Among the drawbacks to the cost of funds method is that it can bedifficult to apply in actual practice. 153 "Because individual creditors borrowfunds at different rates, bankruptcy courts would have to conduct evidentiaryhearings to determine a creditor's cost of funds on a case-by-case basis."'' 54

Also, the cost of funds method could cause bankruptcy courts to treatdebtors unequally because the cram down rate would depend on the rateseach creditor is charged to borrow money.'

Another shortfall of the cost of funds approach, critics argue, is thatcreditors do not receive adequate compensation. 5 6 Although this methodpartially compensates creditors for a lost opportunity, it does not take intoaccount the costs of deferring payment and extending the lending period pastthe time agreed in the original contract. 57 Also, the cost of funds methoddoes not compensate the creditor for transactional costs associated with cramdown. 1

58

148. Gen. Motors Acceptance Corp. v. Valenti (In re Valenti), 105 F.3d 55, 63-64 (2d Cir. 1997),abrogated on other grounds by Assocs. Commercial Corp. v. Rash, 520 U.S. 953 (1997) (citing In reDingley, 189 B.R. 264, 269 (Bankr. N.D.N.Y. 1995)).

149. In re Till, 301 F.3d 583, 589 (7th Cir. 2002), rev'd, 541 U.S. 465 (2004).150. Zywicki, supra note 109, at 253.151. Id. at 255.152. Id. at 254.153. Valenti, 105 F.3d at 64.154. Id. (citing In re Hardzog, 901 F.2d 858, 860 (10th Cir. 1990); In re Dingley, 189 B.R. 264,

271 (Bankr. N.D.N.Y. 1995)).155. Id. at 64.156. Zywicki, supra note 109, at 259.157. Gen. Motors Acceptance Corp. v. Jones, 999 F.2d 63, 67 (3d Cir. 1993).158. Zywicki, supra note 109, at 260. While one can argue that the creditor avoids transaction

costs by not having to make a new loan, "there is no evidence that there is any material decrease inadministrative and default costs when a secured loan becomes a cramdown loan." Id.

Yet another flaw in the cost of funds approach is that it improperlyassumes that creditors have an unlimited supply of capital. 59 Since "everysecured creditor has a limited amount of credit on which to draw,... itfollows that utilizing some of that borrowing capacity without providing thesecured creditor with the usual return on its capital produces a loss for thesecured creditor." 1

60

In addition, the cost of funds approach may give the debtor awindfall. 161 Many creditors are commercial banks, and because of this theyare able to borrow money more cheaply than an ordinary debtor. 162 Thisplaces the debtor in an advantageous situation relative to other similarlysituated debtors not in bankruptcy because the "cost of funds rate will permitthe debtor to use cram down to decrease the interest rate it is paying on itsloan."' 163 Thus, the cost of funds approach may actually provide the debtorwith an incentive to file for bankruptcy. '64

c. The Presumptive Contract Rate Approach

Another way to determine the cram down rate is the presumptivecontract rate approach. Under this method, the original contract rate that thedebtor agreed to in the original loan serves as the presumed interest rate. 165

Both the creditor and debtor are then allowed to rebut this presumption bypresenting evidence before the court to show that the cram down rate shouldbe either higher or lower than the original contract rate. 166

The presumptive contract approach is often tied into an application ofthe coerced loan method. 167 The Third Circuit, for example, has used theoriginal contract as a starting point from which to calculate the coerced loanrate. 168 Under this method, the coerced loan rate is set either higher or lowerthan the contract rate, depending on the evidence presented. 169 The FourthCircuit, on the other hand, has applied the original contract rate as a cap onsetting the coerced loan rate. 170 This method, it argues, prevents the creditor

159. In re Till, 301 F.3d 583, 590 (7th Cir. 2002), rev'd, 541 U.S. 465 (2004) (citing Michael E. S.Frankel, The Emerging Fixed Cramdown Rate Regime: A Market-Driven Argument for EffectiveFixed Rates in Bankruptcy Cramdown, 2 U. CI. L. ScH. ROUNDTABLE 643, 647 (1995)). "The costof funds method presupposes that a creditor will opt to exhaust some of its own credit in order toreplace the liquid capital it would have received after foreclosure and sale." Id.

160. United Carolina Bank v. Hall, 993 F.2d 1126, 1130 (4th Cir. 1993).161. In re Till, 301 F.3d at 590.162. Zywicki, supra note 109, at 253.163. Id.164. Hartman, supra note 140, at 541.165. Gen. Motors Acceptance Corp. v. Jones, 999 F.2d 63, 70-71 (3d Cir. 1993).166. Id.167. See id. at 70; United Carolina Bank v. Hall, 993 F.2d 1126, 1130 (4th Cir. 1993).168. Jones, 999 F.2d at 70-71.169. Id. For example, a creditor could present evidence before the court to show that its current

rate is higher than the original contract rate because of fluctuating interest rates in the market. Id.On the other hand, the debtor could also present evidence to show that the creditor's current rate islower than the contract rate. Id.

170. Hall, 993 F.2dat 1131.


from receiving a windfall by limiting the creditor's claim to the amountprovided for in the original agreement. 171

When tied into the coerced loan method, the presumptive contract ratewill naturally suffer from many of the same faults of that method, such asthe lack of a coerced loan market and the reliance on expert testimony. 172

Yet because the original contract rate serves as a presumption, it willbecome the cram down rate if there is no evidence to show that it should beincreased or decreased. Thus, under the rationale of one court, the partieswill be bound to a rate which they previously agreed was "a fair return to thesecured creditor over an extended period of time." 173

d. The Formula Rate Approach

Yet another method for determining the cram down rate is the formularate approach, which "requires the court to adopt a risk-free market rate as abase, and then add a risk premium corresponding to the court'sdetermination of the riskiness of the reorganization plan. ' 174 Courtsgenerally determine the base by referring to the United States Treasury rateor some other prime rate. 175 The risk premium, which generally ranges fromone to three percent, 176 is determined on a case-by-case basis. 17 7 Becausethe base rate is relatively easy to determine and the risk premium is small,the formula approach can be "clear and predictable." 178

Although the formula rate may be a simple and predictable method, thissimplicity may limit the discretion of a bankruptcy court because it locks thecourt into the risk-free rate with only a small adjustment for risk. 179 Criticsof the formula approach argue that the exercise of judicial discretion isinherent in the Code's cram down provision.' 80 Thus, by restricting thatdiscretion, the formula rate does not conform to the spirit of the cram downprovision."' Another problem with the formula approach is that a risk

171. Id.172. See supra notes 140-146 and accompanying text.173. In re Einspahr, 30 B.R. 356, 356 (Bankr. E.D. Pa. 1983).174. Pearson et al., supra note 99, at 50.175. Id.; see, e.g., Gen. Motors Acceptance Corp. v. Valenti (In re Valenti), 105 F.3d 55, 64 (2nd

Cir. 1997), abrogated on other grounds by Assocs. Commercial Corp. v. Rash, 520 U.S. 953 (1997)("[T]he market rate of interest under § 1325(a)(5)(B)(ii) should be fixed at the rate on a UnitedStates Treasury instrument .... ").

176. See, e.g., In re Collins, 167 B.R. 842, 847 (Bankr. E.D. Tex. 1994) (finding a risk premiumof 2.8% appropriate); In re DeMaggio, 175 B.R. 144, 152 (Bankr. D.N.H. 1994) (finding a riskpremium of 1% sufficient); In re Fisher, 29 B.R. 542, 551-52 (Bankr. D. Kan. 1983) (finding a riskpremium of 1% adequate).177. Pearson et al., supra note 99, at 50-5 1.178. In re Till, 301 F.3d 583, 590 (7th Cir. 2002), rev'd, 541 U.S. 465 (2004).179. Id. at 591.180. Id.181. ld. In the words of the Seventh Circuit:

premium of only one to three percent may be too small to compensatecreditors sufficiently.' 82 Additionally, the risk-free rate cannot be adjustedto account for unusual circumstances within particular market segments suchas increases in interest rates within that market., 83

V. TILL V. SCS CREDIT CORP.

Needless to say, there has been considerable disagreement over theproper interest rate method that should be applied to the Code's cram downprovisions. 184 In 2004, the Supreme Court sought to address this issue inTill v. SCS Credit Corp. 185 Although it was able to render a judgment in thecase, the Court was unable to come to a majority decision. 186 So, despite itsrecent ruling, the Court has failed to resolve definitively the debate overwhich cram down method should be used. 187

A. Facts

The facts of Till are akin to the typical Chapter 13 cram down case. 188

Petitioners Lee and Amy Till purchased a used truck from Instant AutoFinance on October 2, 1998.189 To pay for the truck, the Tills made a $300down payment and financed the remaining balance of $6,425.75 by signing

There are a multitude of possible creditor/debtor relationships subject to the cramdownprovision. Each presents its own risks; to adopt a standard interest rate with limiteddiscretion vested in the bankruptcy court only to take into consideration the contingencyof nonpayment would not necessarily fulfill the statutory command that the creditor beafforded the full value of his interest at the time the reorganization plan becomeseffective. The statutory provision necessarily leaves the particular questions of valuationto the informed discretion of the bankruptcy court. Our adoption of a rigid formula wouldunduly restrict that discretion. The statute contemplates a more particularized inquiry,and we are bound by Congress' policy choice in this regard.

Id.182. In re Busconi, 147 B.R. 54, 55 (Bankr. D. Mass. 1992) (finding the formula rate to be

"patently unfair to secured claimants" and that creditors "should not be denied compensation forprofit and risk of nonpayment in a cramdown.").

183. In re Neff, 89 B.R. 672, 679 (Bankr. S.D. Ohio 1988), amended in part on other grounds by96 B.R. 800 (Bankr. S.D. Ohio 1989).

184. See Depperschmidt, supra note 133, at 457.185. 541 U.S. 465 (2004) (plurality opinion).186. Id. Justice Stevens announced the judgment of the Court and delivered a plurality opinion, in

which Justice Souter, Justice Ginsburg, and Justice Breyer joined. Id. at 468. Justice Thomasconcurred only in the judgment of the plurality and wrote a separate opinion. Id. at 485-86. JusticeScalia delivered a dissenting opinion, in which Chief Justice Rehnquist, Justice O'Connor, andJustice Kennedy joined. Id. at 492.

187. See Marks v. United States, 430 U.S. 188, 193 (1977). "When a fragmented Court decides acase and no single rationale explaining the result enjoys the assent of five Justices, 'the holding ofthe Court may be viewed as that position taken by those Members who concurred in the judgmentson the narrowest grounds .. "' Id. (quoting Gregg v. Georgia, 428 U.S. 153, 169 n.15 (1976)); seealso Hon. James D. Walker, Jr. & Amber Nickell, Bankruptcy, 55 MERCER L. REV. 1101, 1128(2004) ("The lack of a majority opinion raises the question of whether Till is binding precedent.").

188. See Kristopher Aungst, The Supreme Court Till(s) for the Method to Compute CramdownInterest Rates, 2003 No. 8 NORTON BANKR. L. ADVISER 3 ("Till is not factually unique.").

189. Till, 541 U.S. at 469 (plurality opinion).


an installment contract with Instant Auto. 190 Instant Auto immediatelyassigned this contract to Respondent, SCS Credit Corporation ("SCS"), asub-prime lender who makes loans to individuals with poor credit histories,such as the Tills.' 9' Per the terms of the contract, the Tills were required tomake sixty-eight biweekly payments and were charged an interest rate of21% on the outstanding balance for the duration of the loan. 192 To protectits interest, SCS retained the right to repossess the truck should the Tills everdefault on their repayment contract. 193

Unfortunately, the Tills did default on their payments to SCS and onOctober 25, 1999, they filed for bankruptcy under Chapter 13. 194 On thatdate, the Tills still owed SCS $4,894.89 even though the truck was onlyworth $4,000.'9'

Under their repayment plan, the Tills were required to surrender theirfuture earnings to the bankruptcy court for a period of three years. 196

Additionally, $740 of their wages were to be assigned to the trustee eachmonth, who was then required to distribute this money among the Tills'various creditors. 97 Regarding the truck and the secured portion of SCS'sclaim, the Tills invoked the cram down provision of § 1325(a)(5)(B)(ii) in aplan that provided for interest to be paid at an annual rate of 9.5%. 198 SCS,however, objected to this plan claiming that it was entitled to the originalcontract rate of 21%-the rate it could get by selling the truck andreinvesting the proceeds in a loan comparable to the original loan made tothe Tills. 99

190. Id. at 470.191. Id.; In re Till, 301 F.3d 583, 585 (7th Cir. 2002), rev'd, 541 U.S. 465 (2004).192. Till, 541 U.S. at 470 (plurality opinion).193. Id.194. Id.195. Id. Both parties agreed that the truck had a fair market value of $4,000. Id.; Joint Appendix

at 16-17, Till v. SCS Credit Corp., 541 U.S. 465 (2004) (No. 02-1016). In its telling of the facts, theappellate court stated the value of the truck at $4,500. In re Till, 301 F.3d at 585. The JointAppendix that was filed with the Supreme Court, however, lists the value at $4,000. Joint Appendixat 16-17, Till, 541 U.S. 465 (No. 02-1016). Thus, according to § 506(a) of the Bankruptcy Code,SCS had a secured claim of $4,000 and an unsecured claim of $894.89. See 11 U.S.C. § 506(a)(2000).

196. Till, 541 U.S. at 471 (plurality opinion).197. Id.198. Id. The Tills arrived at this rate using the formula rate method by adding a 1.5% risk

premium to the national prime rate of 8%. Id. In this case, the national prime rate of 8% was therate that banks applied to low-risk loans. Id.

199. Id.; Joint Appendix at 19-20, Till, 541 U.S. 465 (No. 02-1016). SCS was the sole creditor toobject to the Tills' Chapter 13 debt adjustment plan. In re Till, 301 F.3d at 585.

B. Procedural History

In a hearing before a bankruptcy court, SCS presented testimony toshow that it normally charged a rate of 21% to customers with poor credit, arate that SCS claimed was typical in the sub-prime market. 00 Testifying onbehalf of the Tills, an economics professor opined that the proposed 9.5%rate was adequate for two reasons: (1) it was financially feasible; and (2)court supervision lowered the risk of nonpayment. 20 ' Finding in favor of theTills, the court overruled SCS's objection and confirmed the debt adjustmentplan and its 9.5% cram down rate.202

In an appeal to the United States District Court for the Southern Districtof Indiana, SCS again asserted that it was entitled to the contract rate of2 1%.203 Relying on its interpretation of Seventh Circuit precedent, whichadopted the coerced loan method, the district court held that SCS's proposedrate of 21% was appropriate.20 4

Unhappy with this result, the Tills appealed to the Seventh Circuit.20 5

Finding that the district court had misread Seventh Circuit precedent, amajority of the court applied the coerced loan method using the originalcontract rate as a starting point from which to adjust the cram down rate.206

To be fair, the court remanded the case to the bankruptcy court so that theparties could each have the chance to rebut the presumptive rate of 21%.207

VI. ANALYSIS OF THE COURT'S DECISION IN TILL V. SCS CREDIT CORP.

When the Supreme Court granted certiorari in June 2003,20 8 it seemedthat the debate over cram down rates would be laid to rest. Because theCourt was unable to reach a majority opinion in Till, however, the issue hasnot been settled.20 9

Justice Stevens, writing a plurality opinion that garnered the support ofthree other Justices, 210 adopted the formula rate approach to Chapter 13 cramdown cases.21 Justice Thomas, although concurring with the plurality'sjudgment in the case, wrote a separate opinion adopting a risk-free approachto cram down.212 Justice Scalia, on the other hand, wrote a dissenting

200. Till, 541 U.S. at 471 (plurality opinion).201. Id. at 471-72. The professor presented his opinion to the court despite admitting that he was

unfamiliar with the sub-prime auto lending market. Id.202. Id. at 472.203. In re Till, 301 F.3d at 586.204. Till, 541 U.S. at 472 (plurality opinion).205. In re Till, 301 F.3d at 586.206. Id. at 592.207. Id. at 593.208. Till v. SCS Credit Corp., 539 U.S. 925 (2003).209. Walker & Nickell, supra note 187, at 1126 (stating that the Court's recent decision in Till

"offers no resolution" on the cram down issue); see also infra Part VII.A.210. Till v. SCS Credit Corp., 541 U.S. 465, 468 (2004) (plurality opinion). Justice Stevens was

joined by Justice Souter, Justice Ginsburg, and Justice Breyer. Id.211. See id. at 479-80.212. Id. at 487.


opinion that drew the support of three other Justices.2 13 In his opinion,Justice Scalia argued that the presumptive contract method should be used inChapter 13 debt adjustment proceedings.21 4 The following section willanalyze and critique each opinion written by the Court in the Till case.

A. Justice Stevens's Plurality Opinion

After laying out the facts and procedural history of the case, JusticeStevens begins his opinion by examining the cram down provision ofChapter 13.215 Justice Stevens first recognizes that the Code "provides littleguidance" as to the appropriate method for computing cram down rates.21 6

He also acknowledges that bankruptcy courts must make a difficult choicewhen faced with what method to apply. 2 7 According to Justice Stevens, acourt must address three important considerations when making thatdecision.218

"First," Justice Stevens writes, "the Bankruptcy Code includesnumerous provisions that.., require a court to 'discoun[t] ... [a] stream ofdeferred payments back to the[ir] present dollar value."' 21 9 Because thesame present value language appears in a number of provisions in the Code,according to Justice Stevens it is likely the intention of Congress to have thesame interest rate method applied to all of the Code's provisions that requirea present value calculation. 220 Additionally, Justice Stevens points out how"Congress would favor an approach that is familiar in the financialcommunity and that minimizes the need for expensive evidentiaryproceedings. 2 2'

Second, Justice Stevens confirms that under § 1322(b)(2) a court'spower to modify the original terms of a loan is "perfectly clear., 222 JusticeStevens goes further by stating that this power may be exercised to "accountfor intervening changes in circumstances., 223

Justice Stevens's final consideration is that § 1325(a)(5)(B) mandates anobjective approach.224 He shuns a subjective approach and posits that §

213. Id. at 491. Justice Scalia was joined by Chief Justice Rehnquist, Justice O'Connor, andJustice Kennedy. Id.

214. Id. at 492.215. See id. at473-77.216. Id. at473.217. Id. at 474.218. Id. at 474.219. Id. (quoting Rake v. Wade, 508 U.S. 464, 472 n.8 (1993)).220. Id. at 474.221. Id. at 474-75.222. Id. at 475.223. Id.224. Id. at 476-77. To support this conclusion, Justice Stevens cites to Rash, 520 U.S. 953, a case

dealing with the proper valuation of collateral. See supra Part IV.A. In that case, Justice Stevens

1325(a)(5)(B) does not require cram down terms to match those provided inthe original contract.225 Therefore, "a court choosing a cram down interestrate need not consider the creditor's individual circumstances ... [r]ather,the court should aim to treat similarly situated creditors similarly. 226

1. Justice Stevens Rejects the Coerced Loan, Presumptive ContractRate, and Cost of Funds Approaches

After setting out these general considerations, Justice Stevens rejects thecoerced loan, presumptive contract rate, and cost of funds approaches statingthat each "is complicated, imposes significant evidentiary costs, and aims tomake each individual creditor whole rather than to ensure the debtor'spayments have the required present value. 227

With respect to the coerced loan approach, Justice Stevens rejects thismethod because it requires bankruptcy courts to delve into "an inquiry farremoved from such courts' usual task of evaluating debtors' financialcircumstances and the feasibility of their debt adjustment plans., 228

Additionally, he argues that transaction costs and overall profits areimproper components to be included in a cram down loan.229

Next, Justice Stevens lists four reasons for rejecting the presumptivecontract rate approach. First, it "improperly focuses on the creditor'spotential use of the proceeds of a foreclosure sale., 230 Second, while JusticeStevens recognizes that the presumptive contract rate approach allows abankruptcy court to avoid overcompensation by tailoring the interest rate toan individual creditor, he notes how this can be a burdensome for the debtorby forcing it to present evidence to rebut the presumptive contract rate.3

Third, Justice Stevens asseverates that the presumptive contract rate"produces absurd results" by allowing "'inefficient, poorly managed lenders'with lower profit margins to obtain higher cramdown rates than 'wellmanaged, better capitalized lenders."' 232 Finally, a dependency on theparties' prior dealings may cause "similarly situated creditors [to] end upwith vastly different cram down rates., 233

notes, the Court held that collateral should be valued from the debtor's perspective rather than thecreditor's perspective. Till, 541 U.S. at 476 n.13 (plurality opinion). Stevens argues that the samerationale should apply in this case. Id. at 476.

225. Id.226. Id. at 476-77.227. Id. at 477.228. Id. As an example, Justice Stevens notes that the coerced loan approach requires a court to

hear evidence regarding the loan market for similar, nonbankrupt debtors. Id.229. Id.230. Id.231. Id.at477-78.232. Id. at 478 (quoting 2 KEITH M. LUNDtN, CHAPTER 13 BANKRUPTCY § 112.1, 112-8 (3d ed.

2000)).233. Id. at 478. To illustrate, Justice Stevens poses the following hypothetical:

[Sluppose a debtor purchases two identical used cars, buying the first at a low purchaseprice from a lender who charges high interest, and buying the second at a much higherpurchase price from a lender who charges zero-percent or nominal interest.

156


Justice Stevens also rejects the cost of funds approach because "itmistakenly focuses on the creditworthiness of the creditor rather than thedebtor. 23 4 Additionally, Justice Stevens notes how this approach suffersfrom some of the same flaws as the presumptive contract rate and coercedloan methods. 35 To illustrate, he notes how the cost of funds approach"imposes a significant evidentiary burden" on the debtor and also how it cancause a situation where creditors are treated inequitably.23 6

2. Justice Stevens Adopts the Formula Approach

After dispensing with the other forms of computing cram down rates,Justice Stevens adopts the formula approach as the proper method to be usedin cram down proceedings.2 37 To set the risk-free basis, Justice Stevensrecommends looking to the national prime rate which estimates how much acommercial bank would charge a creditworthy commercial borrower.238 Inorder to adjust for the risk posed by the bankrupt debtor, factors such as "thecircumstances of the estate, the nature of the security, and the duration andfeasibility of the reorganization plan" should be taken into consideration atthe confirmation hearing.239 While recognizing that this requires the partiesto present evidence before the court, Justice Stevens mentions that some ofthe evidence will be included in the prebankruptcy filings, thereby limitingthe expense of presenting new additional evidence.24 ° Justice Stevens goesfurther, noting that since the risk-free rate is a low estimate that must beadjusted upwards, the primary evidentiary burden will be placed on thecreditor, "who [is] likely to have readier access to any information absentfrom the debtor's [prebankruptcy] filing.",241

In summary, Justice Stevens notes how "the formula approach entails astraightforward, familiar, and objective inquiry, and minimizes the need forpotentially costly additional evidentiary proceedings. 242 He also points out

Prebankruptcy, these two loans might well produce identical income streams for the twolenders. Postbankruptcy, however, the presumptive contract rate approach would entitlethe first lender to a considerably higher cram down interest rate, even though the twosecured debts are objectively indistinguishable.

Id. at 478 n.17.234. Id. at 478.235. Id.236. Id. For example, in order for the debtor to rebut the creditor's coerced loan rate, it would

have to produce evidence regarding the creditor's financial status and at what rate the creditor wouldlend money to similarly-situated debtors. See id.

237. See id. at 477-80.238. Id. at 478-79. This rate, Justice Stevens notes, includes such factors as "opportunity costs of

the loan, the risk of inflation, and the relatively slight risk of default." Id. at 479.239. Id.240. Id.241. Id.242. Id.

how the formula approach takes the focus off the creditor and, instead,places it on the financial markets, the bankruptcy estate, and the loanitself. 243

While Justice Stevens advocates an upward adjustment of the risk-freerate, he refuses to adopt a proper scale for such an adjustment, stating that"the issue is not before us."244 Justice Stevens does, however, showapproval for the 1.5% rate adopted by the bankruptcy court in this case andalso cites to other courts that have applied rates of 1% to 3%.24' Also,Justice Stevens refuses to resolve a dispute among the parties regarding thefailure rate of consumer debt adjustment plans, stating that "[i]t is sufficientfor our purposes to note that ... [the Code] obligates the court to select arate high enough to compensate the creditor for its risk but not so high as todoom the plan., 24 6

3. Justice Stevens Criticizes the Dissent

The next part of Justice Stevens's opinion addresses the issues raised byJustice Scalia's dissent.247 Justice Stevens points out that the dissent makestwo assumptions to support the presumptive contract rate approach, but it is"highly unlikely that Congress would endorse either premise., 248 Regardingthe dissent's first assumption-that "subprime lending markets arecompetitive and therefore largely efficient"--Justice Stevens simply statesthat "there is no basis for concluding that Congress relied on this assumptionwhen it enacted Chapter 13.''249 Justice Stevens also notes how usedvehicles are sold in "tie-in" transactions where purchase prices arenegotiated in tandem with financing terms that are dictated by the seller.25 °

Thus, he argues, there is "no way of determining whether the allocation ofthat price between goods and financing would be the same if the twocomponents were separately negotiated., 25' This is significant, JusticeStevens notes, because the only issue before the Court is the cram downinterest rate and not the value of the truck which is fixed under Rash.252

Additionally, Justice Stevens posits that extensive state and federalregulation of sub-prime lending distorts the market and shows how

243. Id.244. Id. at 480.245. Id. (citing Gen. Motors Acceptance Corp. v. Valenti (In re Valenti), 105 F.3d 55, 64 (2nd

Cir. 1997), abrogated on other grounds by Assocs. Commercial Corp., v. Rash, 520 U.S. 953(1997)).

246. Id. at 480.247. See id. at 481-85.248. Id. at 481.249. Id.250. Id. For example, if the seller knows that he will be able to make money off of finance

charges, he may be willing to sell at a lower price. Conversely, if the buyer pays for the car in cash,the seller may only sell at a price that will compensate for the missed opportunity to collect financecharges.

251. Id. at 482 n.20.252. Id. For an explanation of the Court's previous holding in Rash, see supra Part IV.A.


regulators believe that sub-prime lenders, if left unregulated, "would exploitborrowers' ignorance and charge rates above what a competitive marketwould allow." '253

To rebut the dissent's second assumption-that the risk of default whilein Chapter 13 is usually no less than at the time of the original contract-Justice Stevens argues that "Congress intended to create a program underwhich plans that qualify for confirmation have a high probability ofsuccess."25 4 While acknowledging that bankruptcy judges may confirm toomany risky plans, Justice Stevens suggests that the "solution is to confirmfewer such plans, not to set default cram down rates at absurdly high levels,thereby increasing the risk of default., 255

Next, Justice Stevens briefly addresses the risk-free approach advocatedby Justice Thomas.256 Justice Stevens agrees with Justice Thomas that §1325(a)(5)(B)(ii) may have been written by Congress with no intention ofcompensating for the risk of default. 257 The risk-free approach, however, isultimately rejected by Justice Stevens for two reasons. First, the Court'sdecision in Rash assumed that cram down rates are adjusted to compensatefor risk of default.258 Second, because the risk-free approach has beenrejected by so many judges, it is "too late in the day to endorse that approachnow." 25 9 While Justice Stevens concludes that a risk factor should beincluded in cram down rates, he notes how Justice Thomas's approach,unlike the dissent's, is more consistent with the statutory scheme ofpromoting successful reorganization plans.26°

Justice Stevens further criticizes the dissent, noting that its assumptionsmay not support the presumptive contract rate approach.26' To support thisassertion, Justice Stevens explains that while the cram down provisionapplies to sub-prime loans, it also applies to prime loans that werenegotiated before "the change in circumstance.. . that rendered the debtorinsolvent., 262 Also, cram down applies in situations where national or localeconomies may have changed drastically since the time of the original loancontract. 263 "In either case," Justice Stevens writes, "there is every reason tothink that a properly risk-adjusted prime rate will provide a better estimate

253. Till, 541 U.S. at 482 (plurality opinion).254. Id.255. Id. at 482-83.256. Id. at 483. For a report and analysis of Justice Thomas's risk-free approach to cram down

see infra Part VI.C-D.257. Till, 541 U.S. at 483 (plurality opinion).258. Id.259. Id.260. Id.261. Id.262. Id. at 483-84.263. Id. at 484.

159

of the creditor's current costs and exposure than a contract rate set indifferent times.

To conclude his opinion, Justice Stevens points out that if all relevantinformation was available to the parties, both the formula and presumptivecontract rate approaches would produce the same cram down rate.265 Thus,his primary disagreement with the dissent is upon which party theevidentiary burden should fall.266 According to Justice Stevens, the creditorshould receive the majority of this burden because the creditor is "moreknowledgeable... thereby facilitating more accurate calculation of theappropriate interest rate. 267

B. Critique of Justice Stevens's Plurality Opinion

Although four justices adopted the formula rate approach, JusticeStevens failed to attract the requisite support of a majority of the Court.265

This may be for good reason, as there are significant shortcomingsassociated with the application of the formula rate approach in cram downproceedings.

269

1. The Formula Rate Limits Judicial Discretion

The first drawback to the formula rate approach is that it has thepotential to limit judicial discretion, which is an essential element in cramdown proceedings.27 ° Indeed, Justice Stevens himself recognized that abankruptcy court has the power to modify original loan terms and that suchauthority is "perfectly clear." 271 The formula rate, however, may be tooinflexible because the prime rate starting point is determined by a sourceindependent of the specifics of the case at hand.272 Thus, a judge is bound

264. Id.265. Id.266. Id.267. Id. at 484-85.268. Justices Souter, Ginsburg, and Breyer joined Stevens's opinion. Id. at 468 (plurality

opinion). Justice Thomas wrote a separate opinion concurring only in the judgment of the plurality.Id. at 485 (Thomas, J., concurring). Justice Scalia delivered a dissenting opinion in which ChiefJustice Rehnquist and Justices O'Connor and Kennedy joined. Id. at 491 (Scalia, J., dissenting).Thus, Justice Stevens's selection of the formula rate approach for computing cram down rates issupported only by a plurality of the Court.

269. See infra Part VI.B.1-4.270. Judicial discretion is important in the cram down context because each creditor/debtor

relationship presents its own unique characteristics. See In re Till, 301 F.3d 583, 590-91 (7th Cir.2002), rev'd, 541 U.S. 465 (2004). In order to respond to each specific case, a bankruptcy courtmust have the flexibility to adapt to the circumstances at hand. Id.

271. Till, 541 U.S. at 475 (plurality opinion).272. See In re Till, 301 F.3d at 591. "The statutory provision necessarily leaves the particular

questions of valuation to the informed discretion of the bankruptcy court. Our adoption of a rigidformula would unduly restrict that discretion. The statute contemplates a more particularizedinquiry, and we are bound by Congress' policy choice in this regard." Id.


by the generally accepted prime rate-a percentage that is wholly outside thediscretion of the court. 273

While one may argue that the addition of the risk premium is enough tosatisfy the role ofjudicial discretion, it is important to note that this premiumis set at a small number.274 Indeed Justice Stevens recognizes this when henotes that typical risk premiums range from 1% to 3%.275 Thus, with regardto setting the appropriate cram down rate, judicial discretion is limited to amaximum spread of only two percentage points.

In a similar vein, the formula rate's rigid approach presents anotherissue-the need of the bankruptcy court to adjust to changes incircumstances. Justice Stevens recognizes as much, stating that "thepotential need to modify the loan terms to account for intervening changes incircumstances is... clear., 276 Yet a predetermined prime rate with aminimal risk adjustment can hardly give a bankruptcy court the requisiteroom to set a cram down rate that conforms to the particulars of a certaincase. 277

2. The Formula Rate May Undercompensate Secured Creditors

In addition to its inflexibility, the formula rate approach may result inthe undercompensation of secured creditors. In fact, Justice Stevensacknowledges that the formula rate is a low estimate.2 78 Indeed his primerate is one at which commercial banks lend money to commercialborrowers 279-a far cry from the ordinary consumer subjecting himself tothe liability and expense of a sub-prime loan. 280 To defend his position,Justice Stevens notes how the prime rate can be adjusted upwards in order tocompensate for the increased risk that occurs in sub-prime lending. 28'

However, one must still question whether the 1% to 3% risk adjustment

273. Justice Stevens recommends that a court look to an outside source in order to determine theprime rate. Till, 541 U.S. at 478-79 (plurality opinion) ("[T]he [formula] approach begins bylooking to the national prime rate, reported daily in the press.").

274. See supra note 182 and accompanying text.275. Till, 541 U.S. at 480 (plurality opinion).276. Id. at 475.277. See In re Neff, 89 B.R. 672, 679 (Bankr. S.D. Ohio 1988), amended in part on other grounds

by 96 B.R. 800 (Bankr. S.D. Ohio 1989) ("The problem with [the formula rate] approach is that itdoes not permit sufficient latitude for consideration of unusual factual circumstances present inparticular cases and is not specific for a particular market segment.").

278. Till, 541 U.S. at 479 (plurality opinion).279. Id.280. Generally, commercial borrowers present a lower risk of default than do ordinary consumers

because of their superior resources. This distinction is compounded when compared to a consumerwith poor credit that qualifies only for sub-prime lending.


scale approved by the plurality is enough to compensate non-commercial,secured creditors.282

3. Justice Stevens Fails to Address the Issue of the Proper RiskAdjustment Scale

Another point of criticism of Justice Stevens's plurality opinion is thathe fails to decide on the proper risk adjustment scale for the formula rate.283

Justice Stevens avoids the question simply stating that "the issue is notbefore us."'2 84 Instead, he notes how other courts have approved a 1% to 3%scale, and, thus, the 1.5% rate proposed by the Tills was appropriate.28 5

While Justice Stevens's referral to the other courts may have implicitlyapproved the 1% to 3% scale, one wonders why he failed definitively toaddress such an integral part of the very approach he adopts in this case.286

4. The Formula Rate Suffers From the Same Evidentiary Problems asMany of the Other Cram Down Rate Approaches

While Justice Stevens praises the formula rate as an approach that"minimizes the need for potentially costly additional evidentiary

proceedings, 2 87 this method may present the same evidentiary problems asother cram down approaches. Because the bankruptcy court must adjust theprime rate to account for risk, the parties will still be involved in litigationover the proper risk adjustment.2 88 Indeed, Justice Stevens states that "[t]hecourt must... hold a hearing at which the debtor and any creditors maypresent evidence about the appropriate risk adjustment., 28 9 This process,

282. Harris, supra note 147, at 579.[T]he suggested one percent to three percent cap on a risk-free rate works a graveinjustice to secured creditors .... The potential for undercompensation generated by thisapproach greatly undermines the statutory objective of putting the secured creditor in thesame position he would have been had he been able to repossess the collateral at the timeof bankruptcy.

Id.283. Till, 541 U.S. at 480 (plurality opinion).284. Id.285. Id.286. Mark G. Douglas, Supreme Court Ruling on Cram-Down Interest Rates Creates Uncertainty

for Secured Creditors, JONES DAY BUS. RESTRUCTURING REV., Oct.-Nov. 2004, at 7,http://www.jonesday.com/pubs/detail.asp?language=English&pubid=1631 ("By declining to specifyhow the risk premium is to be computed, the Supreme Court has left the bankruptcy courts in muchthe same position as they were before Till purported to answer definitively the cram-down interestquestion.").

287. Till, 541 U.S. at 479 (plurality opinion).288. Ronald F. Greenspan & Cynthia Nelson, "UnTill" We Meet Again: Why the Till Decision

Might Not Be the Last Word on Cramdown Interest Rates, 23-10 AM. BANKR. INST. J. 48, 70 (2005)."Till virtually mandates that creditors mount 'potentially costly' oppositions to debtors' plans (andthat debtors respond accordingly) or risk being regularly undercompensated for risk. Moreover,certain ambiguities in the opinion also mean that inquiries as to the appropriate risk adjustment maybe less than 'straightforward."' Id.



according to one commentator, "remains fact sensitive" and "will makeadjudication of the issue no less time-consuming to the courts. 290

In short, Justice Stevens's formula approach suffers from the followingweaknesses: (1) it limits judicial discretion; (2) it may undercompensatesecured creditors; (3) its risk adjustment scale is not defined; and (4) itpresents evidentiary problems for the parties and the bankruptcy court.291

C. Justice Thomas's Concurring Opinion

In his concurring opinion, Justice Thomas acknowledges that a streamof deferred payments is worth less than an instant payment, in part becauseof the risk of default.292 According to Justice Thomas, this fact is irrelevant,however, because § 1325(a)(5)(B)(ii) "requires only that 'the value. .. ofproperty to be distributed under the plan,' at the time of the effective date ofthe plan, be no less than the amount of the secured creditor's claim."2 93 Toillustrate, Justice Thomas notes that the cram down provision nevermentions the value of the promise to distribute property under the plan.294

Because § 1325(a)(5)(B)(ii) only mentions the value of property-and notthe value of a promise to distribute property-Justice Thomas adopts a risk-free approach to computing the cram down rate.295

To begin, Justice Thomas reminds the Court of the well-establishedprinciple that "when the statute's language is plain, the sole function of thecourts... is to enforce it according to its terms. 296 Justice Thomas thenposes a brief example in order to explain the basic principles of the timevalue of money.297 Next, Justice Thomas points out the major flaw in boththe plurality and dissenting opinions: the cram down provision does notcontain a requirement that the interest rate reflect the risk of nonpayment.298

According to Justice Thomas, "it is nonsensical to speak of a debtor's risk ofdefault being inherent in the value of 'property' unless that property is apromise or a debt., 299 To illustrate this point, Justice Thomas poses another

290. Harris, supra note 147, at 579; see also Hartman, supra note 140, at 543 ("[T]he riskpremium issue could require significant court time to resolve."); Greenspan & Nelson, supra note288, at 48 ("[Till] imposes significant new evidentiary burdens on secured creditors.").

291. See discussion supra Part VI.B.1-4.292. Till, 541 U.S. at 485 (Thomas, J., concurring).293. Id. at 486 (quoting 11 U.S.C. § 1325(a)(5)(B)(ii) (2000) (emphasis added)).294. Id. at 486 ("[Tlhe statute that Congress enacted does not require a debtor-specific risk

adjustment that would put secured creditors in the same position as if they had made another loan.").295. Id. at 487.296. Id. at 486 (quoting Lamie v. U.S. Tr., 540 U.S. 526, 534 (2004)).297. Id. at 487 n.l. For a brief explanation of the concepts of present value and the time value of

money see supra Part IV.B.1.298. Till, 541 U.S. at 487 (Thomas, J., concurring).299. Id. at 487-88.

hypothetical showing how property, including cash, "can be and isdetermined without any inclusion of any risk that the debtor will fail totransfer the cash at the appropriate time."300 Justice Thomas does agree withthe dissent, however, that the use of the prime rate in cram downproceedings will systematically undercompensate creditors, thus raisingpolicy concerns. 30

1 Nevertheless, Justice Thomas adheres to a strictstatutory interpretation, maintaining that the cram down provision does nottake risk of nonpayment into account.30 2

Next, Justice Thomas notes that in certain circumstances, the risk ofnonpayment can be factored into the cram down rate but only if it is alreadyincluded as part of the value of the property itself.30 3 To explain, JusticeThomas notes how the cram down provision does not limit the term"property" to only cash.3° Instead, it can include such things as securities,personal property, real property, or anything of value. 30 5 Thus, JusticeThomas writes, "if the 'property to be distributed' . . . is a note ... the valueof that note necessarily includes the risk" of nonpayment.30 6 According toJustice Thomas, however, this risk is built into the value of the note itselfand should not play a part in calculating the appropriate cram down rate. 30 7

Justice Thomas next addresses SCS's argument that the cram downprovision was enacted to protect creditors and not debtors.30 8 First, JusticeThomas points out that secured creditors are already partially compensatedfor the risk of nonpayment by the creditor-friendly holding in AssociatesCommercial Corp. v. Rash, which sets the value of a secured claim at thehigher replacement value rather than the lower foreclosure value.30 9 Second,Justice Thomas notes that despite the many creditor-friendly provisionsfound in other subsections of § 1325, Congress chose not to make §

300. Id. at 488. Justice Thomas's hypothetical is as follows:Suppose, for instance, that it is currently time A, the property to be distributed is a house,and it will be distributed at time B. Although market conditions might cause the value ofthe house to fluctuate between time A and time B, the fluctuating value of the house itselfhas nothing to do with the risk that the debtor will not deliver the house at time B. Thevalue of the house, then, can be and is determined entirely without any reference to anypossibility that a promise to transfer the house would not be honored. So too, then, withcash: the value of the cash can be and is determined without any inclusion of any risk thatthe debtor will fail to transfer the cash at the appropriate time.

Id. Justice Thomas poses this hypothetical to show that, while risk can be factor, it is not required toproperly discount property to its present value.

301. Id.302. Id.303. Id.304. Id.305. Id. (citing 7 COLLIER ON BANKRUPTCY, supra note 122, 1129.03[7][b][i], at 1129-44).306. Id. at 488-89. For example, if a creditor were to loan a sum of money in exchange for a note

and charge interest at 7%, a portion of this percentage could be allocated to compensate for risk. Yetthe note itself will still yield a 7% return on the creditor's funds. In this sense, the value of theproperty-i.e., the note-is equal to the principal plus the 7% rate of return.

307. Id. at 489.308. Id. (citing Brief for Respondent at 24, Till, 541 U.S. 465 (No. 02-1016)).309. Till, 541 U.S. at 489 (Thomas, J., concurring) (citing Assocs. Commercial Corp. v. Rash, 520

U.S. 953 (1997)); see also supra Part IV.A.


1325(a)(5) creditor protective by adding a debtor-specific risk adjustmentrequirement.31° According to Justice Thomas, if the risk-free rate isinsufficient to fully compensate secured creditors, the issue is a politicalquestion that should be addressed through Congress rather than remedied bythe Court.3'

Turning to the specifics of the case at hand, Justice Thomas notes thatthe 9.5% interest rate called for by the Tills' proposed plan was higher thanthe risk-free rate.3"' Thus, Justice Thomas concurred in the judgmentbecause the proposed 9.5% rate would "sufficiently compensate" SCS asrequired under § 1325(a)(5)(B)(ii).3 13

D. Critique of Justice Thomas s Concurring Opinion

The principle defect in Justice Thomas's concurring opinion is that hisposition lacks support and goes against the grain of bankruptcy precedent.While Justice Thomas may view the language of § 1325(a)(5)(B)(ii) as clearand enforceable on its terms,3 14 other judges and commentators faced withinterpreting the cram down provision have struggled to extract itsmeaning."' Indeed, the Supreme Court in the instant case was unable tocome to a majority decision on the issue.3 16 Thus, it is not surprising thatJustice Thomas's interpretation of the provision and resulting risk-freeapproach have not been widely accepted. In fact, both the plurality anddissent in this case, as well as virtually all the lower circuit courts, haverejected the risk-free approach in favor of some form of riskcompensation. 317 In addition, the risk-free approach may result in an interest

310. Till, 541 U.S. at 489-90 (Thomas, J., concurring).311. Id. at 490.312. Id. at491.313. See id.314. See id. at 486.315. See Depperschmidt, supra note 133, at 457 ("The interest rate that debtors pay on claims

outstanding at the time of a bankruptcy reorganization hearing arguably is the most debatedeconomic issue in bankruptcy litigation."); Chaim J. Fortgang & Thomas Moers Mayer, Valuation inBankruptcy, 32 UCLA L. REv. 1061, 1119 (1985) ("Few bankruptcy issues have met with as muchconfusion as the determination of a proper discount rate.").

316. See infra note 421.317. See In re Kidd, 315 F.3d 671, 676-77 (6th Cir. 2003) (adopting the coerced loan rate); In re

Till, 301 F.3d 583, 589 (7th Cir. 2002), rev'd, 541 U.S. 465 (2004) (adopting the contract rate); In reSmithwick, 121 F.3d 211, 214 (5th Cir. 1997) (adopting the contract rate); In re Valenti, 105 F.3d55, 64 (2nd Cir. 1997), abrogated on other grounds by Assocs. Commercial Corp. v. Rash, 520 U.S.953 (1997) (adopting the formula rate); Gen. Motors Acceptance Corp. v. Jones, 999 F.2d 63, 71 (3dCir. 1993) (adopting the contract rate); United Carolina Bank v. Hall, 993 F.2d 1126, 1131(4th Cir.1993) (adopting the coerced loan rate capped by the contract rate); In re Fisher, 930 F.2d 1361, 1364(8th Cir. 1991) (adopting the coerced loan rate); In re Fowler, 903 F.2d 694, 698 (9th Cir. 1990)(adopting the formula rate); In re Hardzog, 901 F.2d 858, 860 (10th Cir. 1990) (adopting the coercedloan rate capped by the contract rate); In re S. States Motor Inns, Inc., 709 F.2d 647, 652-53 (11 thCir. 1983) (adopting the coerced loan rate).

rate that even the most qualified and creditworthy borrowers cannotattain."' For these reasons, the risk-free rate has been rejected by the vastmajority of circuit courts31 9 as well as the eight other Supreme Court Justicesin this case.32 °

E. Justice Scalia's Dissenting Opinion

One of these justices, Justice Scalia, begins his dissent by noting that his"areas of agreement with the plurality are substantial., 32' The only area thathe disagrees with is the plurality's use of the formula approach to computingcram down interest rates.322 According to Justice Scalia, the formulaapproach will "systematically undercompensate secured creditors for thetrue risks of default., 323 Instead, he adopts the presumptive contract rateapproach.324 This approach minimizes disputes, Justice Scalia writes,because it is a "good indicator of actual risk. .. and it will provide a quickand reasonably accurate standard., 325

1. Justice Scalia Adopts the Presumptive Contract Rate Approach

To support his endorsement of the presumptive contract rate approach,Justice Scalia posits that the approach makes two important and reasonableassumptions.326 The first assumption is that "subprime lending markets arecompetitive and therefore largely efficient., 327 If this assumption isaccepted as true, then the high interest rates associated with sub-prime loansare a product of the actual risk of default associated with such loans.328

According to Justice Scalia, if the high rates were associated with exorbitant

318. See Greenspan & Nelson, supra note 288, at 48 n.4 ("[M]any solvent commercial borrowerswho are not in bankruptcy may not qualify for a loan at the prime rate."); see also Harris, supra note147, at 579; Hartman, supra note 140, at 543.319. See supra note 317.320. Justice Stevens, writing for a plurality of four Justices, rejects the risk-free rate proposed by

Justice Thomas because it was "too late in the day" to go against the longstanding practice ofaccounting for the risk of default when computing the cram down rate. Till, 541 U.S. at 483(plurality opinion). Justice Scalia, with the support of three other Justices, also rejects the risk-freerate "[b]ecause there is no guarantee that the promised payments will in fact be made .... " Id. at505 (Scalia, J., dissenting).

321. Id. at 491 (Scalia, J., dissenting). Justice Scalia agrees with the plurality in three areas. First,he agrees that some confirmed plans nevertheless fail. Id. Second, Scalia agrees that a securedcreditor is entitled to deferred payments that include an adjustment for the risk of failure of a plan.Id. Finally, he agrees that while adequate compensation may call for an "eye popping" interest rate,a court should "refuse to confirm the plan" rather than reduce that rate. Id.

322. Id. at 491.323. Id. at 492.324. Id.

325. Id.326. Id.327. Id.

328. Id.


profits or costs, "[l]enders with excessive rates would be undercut by theircompetitors, and inefficient ones would be priced out of the market. 3 29

The presumptive contract rate's second assumption, according to JusticeScalia, is that the probability of default does not diminish simply by virtue ofthe fact that the debtor has filed for Chapter 13 relief.330 To support thisstatement, Justice Scalia notes how failure rates of confirmed Chapter 13repayment plans range from the Tills' conservative estimate of 37% to amore realistic rate of 60%.331 Thus, Justice Scalia writes, this relatively highrate of failure of confirmed plans "proves that bankruptcy judges are notoracles and that trustees cannot draw blood from a stone. 332 While JusticeScalia does recognize that judicial and trustee oversight in Chapter 13 willprovide a marginal benefit, the fact that the debtor had to file for bankruptcyshows his financial instability.3 33 Furthermore, "the costs of foreclosure aresubstantially higher in bankruptcy because the automatic stay barsrepossession without judicial permission." 334 For these reasons, JusticeScalia believes it is reasonable to assume that "bankrupt debtors are riskierthan other subprime debtors-or, at the very least, not systematically lessrisky.

335

In summary, Justice Scalia notes that the first assumption means that thecontract rate is a reasonable reflection of actual risk and, according to thesecond assumption, this risk continues even when the debtor files forChapter 13.336 These assumptions lead to Justice Scalia's conclusion that"the contract rate is a decent estimate ... for the appropriate interest rate incram down. 337

2. Justice Scalia Criticizes the Plurality's Decision

Justice Scalia next addresses the plurality's assertions that the sub-primelending markets are not competitive and that risk of default is less in Chapter13 payment plans than in an ordinary sub-prime loan.33t To rebut the

329. Id. To illustrate, if a lender were to charge an extra 10% interest simply for profit, customerswould take their business elsewhere to a lender who would charge a lower rate with, for example,only a 2% profit percentage.

330. Id. at 492-93.331. Id. at 493 n.1 (citing Marjorie L. Girth, The Role of Empirical Data in Developing

Bankruptcy Legislation for Individuals, 65 IND. L.J. 17, 40-42 (1989); Scott F. Norberg, ConsumerBankruptcy's New Clothes: An Empirical Study of Discharge and Debt Collection in Chapter 13, 7AM. BANKR. INST. L. REv. 415,440-41 (1999)).

332. Id. at 493.333. Id.334. Id. at 494 (citing 11 U.S.C. § 362).335. Id.336. Id.337. Id. Justice Scalia is careful to point out that the contract rate serves only as a presumption

and can be adjusted either up or down according to evidence presented to the court. Id. at 494 n.2.338. Id.at494-95.

plurality's first assertion, Justice Scalia acknowledges that while the sub-prime markets are not "perfectly competitive," they are neverthelessreasonably competitive and reasonably efficient. 339 Justice Scalia also notesthat although cars are generally sold in tie-in transactions, this does not meanthat financing terms are dictated by the seller.34 ° Instead, Justice Scaliawrites, "they only cause prices and interest rates to be considered in tandemrather than separately., 341 Justice Scalia appears to make one concession,however, and agrees that the plurality "makes a fair point" when it arguesthat in a tie-in transaction there is no way to determine "whether theallocation of... price between goods and financing would be the same if thetwo components were separately negotiated. 342 Yet Justice Scalia arguesthat this "is not likely to bias the contract-rate approach in favor of creditorsto any significant degree" and "[w]hile joint pricing may introduce someinaccuracy, the contract rate is still a far better initial estimate than the primerate. 343

Next, Justice Scalia argues that the "mere existence of [state] usury lawsis... weak support" for the plurality's position that regulators believe thatthe sub-prime markets are not competitive. 344 He notes that this is only oneof many explanations for the existence of usury laws. 345 Regarding theFederal Truth in Lending Act, 346 Justice Scalia argues that this legislation"positively refutes" the plurality's position.347 According to Justice Scalia,because the Truth in Lending Act requires the disclosure of certaininformation necessary to promote the informed use of credit, it presumesthat markets are competitive--otherwise consumers would have no need forsuch information.3 48 Finally, Justice Scalia notes that while usury laws dodistort the markets, they help keep interest rates low, thereby giving thedebtor a lower rate under the presumptive contract rate approach.349

Regarding the plurality's second assertion-that the risk of default isless in Chapter 13 repayment plans than in ordinary sub-prime loans-

339. Id. at 495 n.3.340. Id. at 495.341. Id. To support this statement Justice Scalia notes how "car sellers routinely advertise their

interest rates, offer promotions like 'zero-percent financing,' and engage in other behavior thatplainly assumes customers are sensitive to interest rates and not just price." Id.

342. Id. at 495 n.4; Id. at 481 n.20 (plurality opinion).343. Id. at 495 n.4 (Scalia, J., dissenting). This is because when a car is sold with a high sale price

and a low interest rate, the creditor will bear the burden of showing that the actual interest rate isgreater than stated on the sales contract. Id. If, on the other hand, a car is offered with a low salesprice and a high interest rate, the buyer can obtain financing at a lower rate from a third party andbenefit from the low sales price. Id.

344. Id. at 496.345. Id. According to Scalia, one such alternative explanation would be that the laws were

enacted to keep interest rates low for those with financial difficulties. Id. (citing Edward L. Glaeser& Jos6 Scheinkman, Neither a Borrower Nor a Lender Be: An Economic Analysis of InterestRestrictions and Usury Laws, 41 J.L. & ECON. 1, 26 (1998)).

346. 15 U.S.C. §§ 1601-13, 1631-49, 1661-65, 1666(a)-(j), 1667(a)-(e), 1671-77 (2000).347. Till, 541 U.S. at 496 (Scalia, J., dissenting).348. Id.349. Id. at 496 n.5.


Justice Scalia points out that the plurality assumes that Chapter 13 would beless risky if fewer risky plans were confirmed, rather than being less risky ascurrently administered.350 Justice Scalia adds that the formula rate wouldnot fully compensate creditors:

While full compensation can be attained either by low-risk plansand low interest rates, or by high-risk plans and high interest rates,it cannot be attained by high-risk plans and low interest rates,which, absent cause to anticipate a change in confirmation practices,is precisely what the formula approach would yield.35'

Next, Justice Scalia addresses the plurality's argument that transactioncosts and profits should not be included in the cram down rate.352 To rebutthis argument, Justice Scalia notes that the plurality's prime lending rateitself includes overhead and profits,3 53 because commercial lenders do notlend money if they cannot cover their costs and make some form of profit. 354

Finally, regarding the plurality's argument that similarly situatedcreditors may be treated differently under the presumptive contract rateapproach, Justice Scalia responds by noting that a bankruptcy judge has thepower to exercise his discretion and adjust the contract rate to avoid anydisparity among similar creditors.355 Again, he reminds the Court that thecontract rate should serve as a reasonably accurate presumption that may beadjusted according to the circumstances of the particular case.356

3. Justice Scalia Criticizes the Formula Rate Approach

In the next section, Justice Scalia opines as to the flaws in the formularate approach.357 Also, Justice Scalia analyzes the proper scale for riskadjustment, something that the plurality specifically refuses to address. 358

To begin, Justice Scalia notes that the risk premium used by the formula rateapproach "is neither objective nor easily ascertainable. 359 While the effectof this flaw is minimized when the risk premium is relatively smallcompared to the prime rate, according to Justice Scalia, a properly computedrisk premium would generally be greater than the prime rate in order to

350. Id. at 496-97.351. Id. at 497.352. Id.353. Id.354. Id. (citing Koopmans v. Farm Credit Servs. of Mid-Am., 102 F.3d 874, 876 (7th Cir. 1996)).355. Id. at 498.356. Id. at 498 n.7.357. See id. at 498-504.358. Id. at 480 (plurality opinion) ("We do not decide the proper scale for the risk adjustment, as

the issue is not before us.").359. Id. at 498-99 (Scalia, J., dissenting).

ensure that secured creditors are fairly compensated.36 Thus, Justice Scaliawrites, "[w]hen the risk premium is the greater part of the overall rate, theformula approach no longer depends on objective and easily ascertainablenumbers. The prime rate becomes the objective tail wagging a dog of

,,361unknown size.Stemming from this lack of objectivity, according to Justice Scalia, is

the fact that the application of the formula rate approach is anything butsimple.362 Instead, the formula approach requires a bankruptcy court tocompute a risk premium in every case. 363 Thus, "judges will invariablygrapple with [the] imponderables" such as "the probability of planfailure; ... the rate of collateral depreciation; ... the liquidity of thecollateral market, and. . . the administrative expenses of enforcement. ' 364

In contrast, Justice Scalia notes how the contract rate will reflect all of theserisk factors because it is determined by the market. 365 Additionally, thecontract rate can be easily found in the original loan document and need onlybe adjusted if the parties choose to contest it. 366

Next, Justice Scalia rebuts the argument that the formula approachproperly places the evidentiary burden on the creditor who has better accessto the requisite information.367 Justice Scalia points out that, "consciouslychoosing the less accurate estimate merely because creditors have betterinformation smacks more of policymaking than of faithful adherence to thestatutory command that the secured creditor receive property worth 'not lessthan the allowed amount' of its claim., 368 Also, Justice Scalia predicts thatin most consumer loan cases the cost of litigating the risk premium canmake the issue not worth litigating.3 69 Thus, Justice Scalia opines, "it is farmore important that the initial estimate be accurate than that the burden ofproving inaccuracy fall on the better informed party."37

To illustrate his point, Justice Scalia uses the instant case as an exampleof the shortcomings of the formula rate approach. 371 According to JusticeScalia, there is nothing in the record to substantiate the recommendation ofthe 1.5% rate by the Tills' expert witness-especially considering the factthat the witness admitted that he had only a marginal familiarity with thesub-prime market and that he had no familiarity with default rates or marketcollection costs.372 "In light of these devastating concessions," Justice

360. See id. at 499.361. Id.362. Id.363. Id. at 499.364. Id.365. Id.366. Id.367. See id. at 500.368. Id. (quoting II U.S.C. § 1325(a)(5)(B)(ii) (emphasis added by the Court)).369. Id.370. Id.371. See id. at 500-02.372. Id. at 500-01.


Scalia writes, "it is impossible to view the 1.5% figure as anything otherthan a smallish number picked out of a hat. 373

Next, Justice Scalia compares the nominal benefit the creditor wouldreceive under the formula rate with the expected costs of default.3 74

According to Justice Scalia's calculations, the benefit to SCS in this casewould amount to about $100. 37 5 Justice Scalia then compared this numberwith three costs of default, the first of which is the cost associated withdepreciation of the collateral.376 In this case, Justice Scalia calculated thecost of depreciation to be approximately $550. 3 77

Justice Scalia's second cost of default is liquidation.378 Here, SCS wasentitled to the $4,000 replacement cost.379 However, if the Tills were todefault under their Chapter 13 plan, SCS would not be able to sell the truckfor $4,000 "because collateral markets are not perfectly liquid and there isthus a spread between what a buyer will pay and what a seller willdemand.5 380 According to Justice Scalia, the value of this spread in this casecould be calculated to be about $450.381

Justice Scalia's third and final cost of default is the administrativeexpenses associated with foreclosure.382 To estimate these costs JusticeScalia notes how the automatic stay provided by § 362 of the Code bars

373. Id. at 501.374. Id.375. See id. at 501-02. To come to this number, Justice Scalia explains that if the 1.5% risk

premium were fully paid it would produce about $60.Given its priority, and in light of the amended plan's reduced debtor contributions, the$4,000 secured claim would be fully repaid by about the end of the second year of theplan. The average balance over that period would be about $2,000, i.e., half the initialbalance. The total interest premium would therefore be 1.5% x 2 x $2,000 = $60. In thisand all following calculations, I do not adjust for time value, as timing effects have nosubstantial effect on the conclusion.

Id. at 501 n.8. Next, Scalia notes that if the debtor defaulted, the expected value of the $60 would beonly $50. Id. at 501. "Assuming a 37% rate of default that results on average in only half theinterest's being paid, the expected value is $60 x (1-37%[/]2), or about $50." Id. at 501 n.9. To this$50, Scalia adds another $50 that represents the compensation for risk that is already included in theprime rate. Id. at 501. Thus, the total expected benefit to SCS was $100. id. at 502.

376. See id. at 501-02.377. Id. "On the original loan, depreciation ($6,395 - $4,000, or $2,395) exceeded loan repayment

($6,426 - $4,895, or $1,531) by $864, i.e., 14% of the original truck value of $6,395. Applying thesame percentage to the new $4,000 truck value yields approximately $550." Id. at 502 n. 12.

378. Id. at 502.379. Id.380. Id. at 503.381. Id. To come to this number Scalia used the Rash case as a rough guide. Id. at 503 n.13; see

Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 965 (1997). "The truck in Rash had areplacement value of $41,000 and a foreclosure value of $31,875, i.e., 22% less. If the market in thiscase had similar liquidity and the truck were repossessed after losing half its remaining value, theloss would be 22% of $2,000, or about $450." Till, 504 U.S. at 503 n.13 (Scalia, J., dissenting)(citing Rash, 520 U.S. at 957).

382. Till, 541 U.S. at 503 (Scalia, J., dissenting).

repossession of the collateral.383 To overcome this bar, a creditor must pay afee and file a motion to lift the stay.3 84 Also, a creditor will incur attorneyfees for filing such motions, which Justice Scalia calculates to beapproximately $600 or more.385

Thus, the total costs of default in this case would be $1,600.386 Becausenot all Chapter 13 plans fail, Justice Scalia applies the Tills' estimated 37%failure rate of Chapter 13 repayment plans to come to an expected cost ofdefault of $590.387 To compensate for the disparity between the $590expected cost and the $100 expected benefit, Justice Scalia notes that therisk premium would have to be 16% rather than the 1.5% adopted by theplurality. 388 Thus, in Justice Scalia's opinion, the plurality's rate is entirelyinadequate and "is far below anything approaching fair compensation.', 389

4. Justice Scalia Criticizes of Justice Thomas's Concurring Opinion

In response to Justice Thomas's opinion that § 1325(a)(5)(B)(ii) plansneed only include a risk-free rate of interest, Justice Scalia presents fourreasons why a plan must account for the risk of nonpayment. 390 The first isa contextual argument. While the cram down provision does not specificallymention the risk of nonpayment, Justice Scalia argues that the context of theother two options found in § 1325(a)(5) support a reading that includes a riskadjustment. 39' The creditor acceptance and collateral surrender options "areboth creditor protective, leaving the secured creditor roughly as well off ashe would have been had the debtor not sought bankruptcy protection. 392

Therefore, "it is unlikely the [cram down] option was meant to besubstantially underprotective; that would render it so much more favorableto debtors that few would ever choose one of the alternatives. 393

Justice Scalia's second criticism of the risk-free approach is that itproduces "anomalous results. 394 According to Justice Scalia, JusticeThomas admitted that if a note, rather than cash, was to be distributed undera plan, the note must take into account the risk of default. 395 Thus, theanomaly is that secured creditors would receive risk compensation in certain

383. Id. (citing 11 U.S.C. § 362).384. Id. at 503. Here, Scalia notes that the fee in this case would be $150. Id. (citation omitted).385. Id. In Indiana and other states, Scalia points out that attorney fees range anywhere from $350

to $875 per motion. Id. (citation omitted).386. Id.387. Id. at 503.388. Id. at 504.389. Id.390. See id. at 505-508.391. Id. at 505.392. Id.393. Id.394. Id.395. Id.


cases that have no practical difference from other cases where no suchcompensation is allowed.396

The third criticism is that the circuits have all rejected the risk-freeapproach.397 According to Justice Scalia, there is no evidence that the lowercourts have adopted the risk-free approach, and Justice Thomas neveridentifies such a case.395

Justice Scalia's final criticism of the risk-free approach is that it is notsupported by the Court's decision in Rash.399 Justice Thomas argued thatbecause the Rash decision set the value of collateral at the higher debtorreplacement cost, the secured creditor has already been compensated.40 °

Yet, as Justice Scalia argues, while Rash did point out that there is a greaterrisk involved in retention of collateral rather than surrender, the Court "madeno effort to correlate that increased risk with the difference betweenreplacement and foreclosure value., 40

' According to Justice Scalia,"[n]othing in the opinion suggests that we thought the valuation differencereflected the degree of increased risk, or that we adopted the replacement-value standard in order to compensate for increased risk., 40 2 Additionally,Justice Scalia remarks that setting a specific approach to valuing collateralwould not be the choice action "[i]f Congress wanted to compensate securedcreditors for the risk of plan failure. 40 3

To conclude his opinion, Justice Scalia notes that "[e]very action in thefree market has a reaction somewhere. ' 4° Justice Scalia argues that thesystematic undercompensation of secured creditors in cram down plans willresult in an increase in interest rates overall and a decrease in the access tocredit.40 5 Thus, because cram down requires full compensation for risk,Justice Scalia adopts the presumptive contract rate approach because it "hasa realistic prospect of enforcing that directive. 4 6

396. Id. at 505-06 ("There is no conceivable reason why Congress would give secured creditorsrisk compensation in one case but not the other.").

397. Id. at 506.398. Id.; see also supra note 317 and accompanying text.399. Till, 541 U.S. at 506 (Scalia, J., dissenting) (citing Assocs. Commercial Corp. v. Rash, 520

U.S. 953 (1997)).400. Id.; see also supra note 309 and accompanying text.401. Till, 541 U.S. at 507 (Scalia, J., dissenting).402. Id.403. Id.404. Id. at 508.405. Id.406. Id.

173

F. Critique of Justice Scalia's Dissenting Opinion

Although Justice Scalia did not speak for a majority of the Court, hisdissenting opinion was able to draw the support of three other Justices.4 °7

Indeed, if he had been able to garner the support of just one more Justice, hisopinion would be the majority rather than the dissent. Nevertheless, thereare reasons why a majority of the Court did not see things as Justice Scaliasaw them.

One of Justice Scalia's principal reasons for dissenting is that, in hisview, the formula rate approach "will systematically undercompensatesecured creditors. 4°8 While this statement may be true, it is important toremember that Congress intended Chapter 13 bankruptcy to allow debtors toget back on their feet. 40 9 In addition to this pro-debtor stance, Chapter 13was intended to be an alternative to liquidation under Chapter 7.410 In thissense, Chapter 13 benefits creditors in that many times they will be able torecover more under a repayment plan than under liquidation.411 Thus, theconcern over undercompensation is minimized when creditors receive morevalue than under a liquidation proceeding.

Another concern over Justice Scalia's presumptive contract rateapproach is that it places a significant burden of proof on the shoulders ofthe debtor. In his defense, Justice Scalia states that the contract rate willonly become an issue if the parties choose to dispute it. 412 Yet in reality, it isdifficult to imagine a situation where a debtor would not want to contest therate which may have contributed to his current financial plight. To do this,the debtor is forced to take on the task of investigating the creditor ratherthan focusing his efforts on drafting a feasible repayment plan.413 Indeed,Justice Scalia himself notes how the debtor may need to present evidence inorder to show that the creditor is substantially oversecured.414 Thus, thepresumptive contract rate heaps the burden of proving the creditor'sfinancial condition onto the plate of a consumer who is already faced withfinancial pressures and the difficulty associated with filing for bankruptcy.415

407. Justice Scalia was joined in his dissent by Chief Justice Rehnquist and Justices O'Connor andKennedy. Id. at 491.

408. Id. at 492.409. H.R. REP. No. 95-595, at 118 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6079

("[Consumer] bankruptcy relief should be effective, and should provide the debtor with a freshstart.").410. See H.R. REP. No. 95-595, at 118, reprinted in 1978 U.S.C.C.A.N. 5963, 6079.411. H.R. REP. No. 95-595, at 118, reprinted in 1978 U.S.C.C.A.N. 5963, 6079 ("The benefit to

creditors [under Chapter 13] is self-evident: their losses will be significantly less than if their debtorsopt for straight bankruptcy.").412. Till, 541 U.S. at 499 (Scalia, J., dissenting).413. Id. at 478 (plurality opinion) ("The debtor must obtain information about the creditor's costs

of overhead, financial circumstances, and lending practices to rebut the presumptive contract rate.").414. Id. at 499 (Scalia, J., dissenting).415. Proponents of the presumptive contract rate, however, argue that the formula rate yields

much too low an estimate. Id. at 500. In contrast, the presumptive contract rate is more reflective ofthe actual costs and risk involved in Chapter 13 repayment plans. Id. Therefore, "it is far moreimportant that the initial estimate be accurate than that the burden of proving inaccuracy fall on thebetter informed party." Id.


Finally, Justice Scalia's endorsement of the presumptive contract ratemay be undermined by the fact that Congress may have already rejected theapproach. In 1983, Congress considered but ultimately rejected a bill thatwould have supported the presumptive contract rate.46 Given this action, ared flag is raised as to whether the approach advocated by Justice Scaliacomports with congressional intent.4 17

VII. THE IMPACT OF TILL V. SCS CREDIT CORP.

In Till, the Court sought to give meaning to the phrase "value, as of theeffective date of the plan. ' ' 411 While the opinions in Till specificallyaddressed cram down in Chapter 13, the case is likely to have repercussionsin other areas of the Code that contain similar cram down language. 4 9 Thissection will first discuss the value of Till's precedent and subsequentbankruptcy court decisions and then address the likely impact of Till on theCode and on financial markets as a whole.

A. Is Till Binding Precedent?

While many anticipated a resolution to the cram down interest rateissue, 420 the Court in Till did not provide us with a clear-cut majorityanswer. 421' Because Till is a plurality opinion with no majority, questionsarise as to its precedential value on lower courts.4 22 In this case, there are

416. Id. at 480 n.19 (plurality opinion) (citing H.R. 1085, 98th Cong. § 19(2)(A) (1983)).417. See Krawitz, supra note 107, at 904.418. 11 U.S.C. § 1325(a)(5)(B)(ii) (2000).419. See 11 U.S.C. § 1129(b)(2)(A)(i)(II) (2000) (cram down provision under Chapter 11

bankruptcy); 11 U.S.C. § 1225(a)(5)(B)(ii) (2000) (cram down provision under Chapter 12bankruptcy); Thomas J. Yerbich, How Do You Count the Votes-or Did Till Tilt the Game?, 23-6AM. BANKR. INST. J. 10, 10 (2004); Till v. SCS Credit Corp.-U.S. Supreme Court RejectsApplication of Contract Rate to Deferred Cram Down Payments, SHEARMAN & STERLING CLIENTPUBL'N., May 24, 2004, http://www.shearman.com/documents/CM_052404.pdf.420. Roger S. Cox & Marc W. Taubenfeld, Bankruptcy and Creditors' Rights, 57 SMU L. REV.

611, 614 (2004) (anticipating Till as providing a resolution to the issue of the proper Chapter 13cram down interest rate method); Hon. Barbara J. Houser et al., Disclosure Statements;Confirmation and Cramdown of Chapter 11 Plans, SJ082 A.L.I.-A.B.A. PROGRAM MATERIAL 305,341 (2004) (anticipating Till as providing a resolution to the issue of the proper Chapter II cramdown interest rate method).

421. Justice Stevens announced the judgment of the Court and delivered a plurality opinion inwhich Justice Souter, Justice Ginsburg, and Justice Breyer joined. Till, 541 U.S. at 467. JusticeThomas concurred only in the judgment of the plurality and wrote a separate opinion. Id. at 485.Justice Scalia delivered a dissenting opinion in which Chief Justice Rehnquist, Justice O'Connor,and Justice Kennedy joined. Id. at 491.

422. See Marks v. United States, 430 U.S. 188, 193 (1977). "When a fragmented Court decides acase and no single rationale explaining the result enjoys the assent of five Justices, 'the holding ofthe Court may be viewed as that position taken by those Members who concurred in the judgmentson the narrowest grounds ... ' Id. (quoting Gregg v. Georgia, 428 U.S. 153, 169 n.15 (1976));Yerbich, supra note 419, at 10 ("Plurality pronouncements have long been the bane of lower federal

two ways to view the Court's plurality opinion. First, because the formularate and the presumptive contract rate each drew the support of four justices,one option is to view this split as giving bankruptcy courts a choice betweenthe two methods.42 3 The second option is to view the Till opinion as givingbankruptcy courts a majority answer on which methods not to use. Forexample, since the plurality adopted the formula rate and Justice Thomasadopted the risk-free rate, it follows that a majority of the court rejected allother approaches including the presumptive contract approach argued by thedissent.424 While the precedent of Till may be susceptible to differentinterpretations, recent bankruptcy court decisions dealing with cram downissues lend support to the latter option.425

B. Subsequent Bankruptcy Court Decisions

As of August 2005, there have been twelve post-Till court decisions thathave addressed the Chapter 13 cram down interest rate issue.426 In eleven ofthese cases, the bankruptcy courts followed the formula rate approach asadopted by the plurality in Till.

427 Thus, it appears that the immediate trendamong bankruptcy courts is to follow the plurality's formula rateapproach.428 In fact, some have even read Till as definitively ending thedispute over the proper cram down interest rate.429 Despite this readiness toadopt the formula rate approach, at least one court has decided to not tofollow the plurality holding of Till.4 30

courts in attempting to apply them."); Walker & Nickell, supra note 187, at 1128 ("The lack of amajority opinion raises the question of whether Till is binding precedent.").

423. See Walker & Nickell, supra note 187, at 1128 ("Whether or not the courts will be able tofind some narrow grounds of agreement on which to base future decisions remains to be seen.").424. See Yerbich, supra note 419, at 10.425. See infra Part VII.B.426. See In re Cachu, 321 B.R. 716 (Bankr. E.D. Cal., 2005); In re Caple, No. 05-50213, 2005

Bankr. LEXIS 1094 (Bankr. M.D.N.C. Apr. 4, 2005); In re Cook, 322 B.R. 336 (Bankr. N.D. Ohio2005); In re Pike, No. 03-16382, 2005 Bankr. LEXIS 381 (Bankr. D. Kan., Mar. 10, 2005); In reWilloughby, 324 B.R. 66 (Bankr. S.D. Ind., 2005); Nowlin v. Tammac Fin. Corp. (In re Nowlin),321 B.R. 678 (Bankr. E.D. Pa., 2005); In re Berksteiner, No. 03-13203, 2004 Bankr. LEXIS 1576(Bankr. S.D. Ga. Sept. 9, 2004); In re Bivens, 317 B.R. 755 (Bankr. N.D. 111. 2004); In re Harken,No. 04-02914, 2004 Bankr. LEXIS 2062 (Bankr. N.D. Iowa Nov. 29, 2004); In re Pokrzywinski,311 B.R. 846 (Bankr. E.D. Wis. 2004); In re Scrogum, No. 04-72289, 2004 Bankr. LEXIS 1376(Bankr. C.D. I11. Sept. 15, 2004); In re Smith, 310 B.R. 631 (Bankr. D. Kan. 2004).

427. See In re Cachu, 321 B.R. at 718-19; In re Caple, 2005 Bankr. LEXIS 1094, at *27; In rePike, 2005 Bankr. LEXIS 381, at *6; In re Willoughby, 324 B.R. at 70; In re Nowlin, 321 B.R. at685; In re Berksteiner, 2004 Bankr. LEXIS 1576, at *3-4; In re Bivens, 317 B.R. at 763; In reHarken, 2004 Bankr. LEXIS 2062, at *3; In re Pokrzywinski, 311 B.R. at 849; In re Scrogum, 2004Bankr. LEXIS 1376, at *3; In re Smith, 310 B.R. at 633.

428. See Craig Rankinand & Christopher Alliotts, The Importance of 'Till', NAT'L L.J., Sept. 6,2004, at 13 ("[T]he plurality's more traditional formula approach will probably continue to be themethod applied by bankruptcy courts.").

429. See, e.g., In re Bivens, 317 B.R. at 763 ("The Supreme Court ended the dispute among thecircuit courts as to which approach provides equivalent present value of an allowed secured claim aspaid over time when it decided Till v. SCS Credit Corp.").430. See infra notes 431-36 and accompanying text.


In Ohio, a bankruptcy court recently decided to eschew Till's formularate approach in favor of the coerced loan approach that the Sixth Circuithad previously adopted.43' In that case, the court was faced with the cramdown provision of § 1325(a)(4), which deals with unsecured creditors inChapter 13 proceedings.432 While Till addressed secured creditors under §1325(a)(5)(B), both provisions contain the identical cram down language of"value, as of the effective date of the plan., 433 Nevertheless, the court heldthat Till was not binding authority because there was no majority opinion.434

In its reasoning, the court stated that "the opinion of five Justices makes thelaw of the land, but the opinion of four Justices makes interestingreading. 435

Despite this single case, however, the majority of bankruptcy courtshave followed the plurality's formula rate approach.436 Yet while thereappears to be some agreement in the context of Chapter 13 consumer debtadjustment, it remains to be seen whether Till will be applicable in contextsother than Chapter 13 cases.437

C. How Will Till Affect Bankruptcy Under Chapter 11?

While the specific facts of Till limited the opinions of the Court to theChapter 13 context, Till's impact may affect Chapter 11,438 which contains asimilar cram down provision.439 Indeed, Justice Stevens noted that it was"likely that Congress intended bankruptcy judges and trustees to followessentially the same approach when choosing an appropriate interest rateunder any of [the cram down] provisions." 440 While this statement mayseem to indicate that Till applies to all cram down provisions, commentatorshave raised some questions as to whether or not Till should be applied in the

431. In re Cook, 322 B.R. at 346.432. See 11 U.S.C. § 1325(a)(4) (2000); In re Cook, 322 B.R. at 339.433. Compare 11 U.S.C. § 1325(a)(4) (2000) ("[V]alue, as of the effective date of the plan ..

with 11 U.S.C. § 1325(a)(5)(B)(ii) (2000) ("[V]alue, as of the effective date of the plan ... ").434. See In re Cook, 322 B.R. at 341-45. "The lack of a legal rationale shared by five Justices

leads to the inescapable conclusion that Till does not produce binding precedent." Id. at 341435. Id. at 344.436. See supra note 426-27 and accompanying text.437. See infra Part VII.C.438. Chapter 11 of the Code deals with commercial reorganization. See generally 11 U.S.C. §§

1101-1174 (2000).439. See 11 U.S.C. § 1129(b)(2)(A)(i)(lI) (2000) (cram down provision under Chapter 11

bankruptcy); see also John J. Rapisardi, Court Adopts Chapter 13 Interest Rate for SecuredCreditors, N.Y.L.J., July 22, 2004, at 3 ("The Till plurality's rejection of the market approach todetermining value may have repercussions in other areas of the Bankruptcy Code, such asdetermining the valuation of a company in the context of making distributions to creditors under achapter 11 plan of reorganization.").

440. Till v. SCS Credit Corp., 541 U.S. 465, 474 (2004) (plurality opinion).

Chapter 1 1 context. 44' Some of these suspicions seem to stem from anunassuming footnote in Justice Stevens's plurality opinion.442 In thatfootnote, Justice Stevens reminds us that there is no readily apparent marketfor cram down loans in the Chapter 13 context. 44 3 Justice Stevens goesfurther, however, and notes that "the same is not true in the Chapter 11context, as numerous lenders advertise financing for Chapter 11 debtors inpossession. 444 Thus, Justice Stevens recommends that "when picking acram down rate in a Chapter 11 case, it might make sense to ask what rate anefficient market would produce."" 5

According to one commentator, Justice Stevens's note "appear[s] toleave the door open to argument that the formula approach should not applybecause of the existence of a [debtor in possession] lending market that canact as a benchmark for cram-down interest rates."" 6 The fact that there isno efficient market for sub-prime auto loans seems to have been a majorreason why Justice Stevens adopted the formula rate approach. 44 Incontrast, there does appear to be an efficient sub-prime loan market inChapter 1 1 cases, 44 8 and, therefore, "we are left to wonder if footnote 14nullifies Till in a chapter 11 context ... , modifies its application or ismerely an irrelevant musing." 449 Also, the fact that this footnote is dictaadds to the uncertainty. a0 In the words of one commentator, "[w]e are leftonce again to wrestle with the dreaded footnote, which in the twinkling of aneye renders what might have been a consistent.., opinion into anambiguous platform in the Chapter 11 context. 45'

In addition to the ambiguities raised by Justice Stevens's footnote,another question threatens Till's effect on Chapter 11. This issue stems from

441. Daniel J. Carragher, News at 11: What the Supreme Court's Prime Plus Ruling Means forChapter 11, 23-6 AM. BANKR. INST. J. 26, 26 (2004) ("[T]here are many reasons why the Till rulingshould not affect existing precedents under chapter 11."); Douglas, supra note 286 ("[W]e are left tospeculate concerning Till's impact on cram-down interest rates under a chapter 11 plan.");Greenspan & Nelson, supra note 288, at 48 ("[P]articularly in a chapter 11 context, Till raises a hostof issues and contains numerous internal contradictions that inevitably will only be resolved uponapplication and appeal.").

442. See Till, 541 U.S. at 477 n.14 (plurality opinion).443. Id.444. Id. (citing, e.g., Balmoral Financial Corporation, http://www.balmoral.com/bdip.htm; Debtor

in Possession Financing: Ist National Assistance Finance Association DIP Division,http://www.loanmallusa.com/dip.htm).

445. Id.446. Douglas, supra note 286.447. Greenspan & Nelson, supra note 288, at 48.448. See supra note 444 and accompanying text.449. Greenspan & Nelson, supra note 288, at 48. Yet according to one commentator, Till may

nevertheless have a lingering effect on Chapter II in that creditors will "face an uphill battle inopposing confirmation of a plan that utilizes the formula rate in a chapter II case." Till v. SCSCredit Corp.-U.S. Supreme Court Rejects Application of Contract Rate to Deferred Cram DownPayments, SHEARMAN & STERLING CLIENT PUBL'N., May 24, 2004,http://www.shearman.com/documents/CM-052404.pdf.450. See Humphrey's Ex'r v. United States, 295 U.S. 602, 627 (1935) (finding that dicta "may be

followed if sufficiently persuasive" but are not controlling).451. Robert C. Goodrich, Jr. & Madison Cashman, Money in the "Till", 2004 No. 10 NORTON

BANKR. L. ADVISER 1.


the different policy concerns raised by Chapter 1 1 and Chapter 13.452 In hisendorsement of the formula rate approach, Justice Stevens was aware thatthe process of filing for Chapter 13 debt adjustment should be as simple andstraightforward as possible for the debtor.453 In fact, Justice Stevens made aconscious effort to place the evidentiary burden squarely on the shoulders ofthe secured creditor.454 Yet some would argue that the same policy concernsare not present in the Chapter 11 context, and, thus, the Till ruling should notapply. 455 As one commentator stated:

The Court was split, we suspect, because this case involved aconsumer debtor. Although Chapter 13's cramdown provision istheoretically identical in substance to § 129(b)(2)(A), we doubt theCourt would have reached the same conclusion if the secured lenderwere the United States with a tax lien or if the debtor were abusiness debtor.456

Therefore, because Chapter 13 involves consumers and Chapter 11 involvescommercial entities, the different policy concerns attached to each may limitTill's reach.457 Nevertheless, Till will likely "provide additional fodder forbusiness debtors to squeeze secured lenders in contested bankruptcyconfirmations. 458

With the uncertainties raised by Justice Stevens's footnote and thevarious policy concerns involved in applying Till to Chapter 11 cram downcases, it may be helpful to examine how bankruptcy courts have addressedthis issue. As of August 2005, at least two bankruptcy courts have examinedTill's effect on Chapter I l's cram down provision. Interestingly, bothcases refused to hold Till's formula rate approach as binding authority,finding that "Till is instructive, but it is not controlling, insofar as mandating

452. See Carragher, supra note 441, at 26, 64.

453. See Till v. SCS Credit Corp., 541 U.S. 465, 479 (plurality opinion) (noting how the formulaapproach "entails a straightforward, familiar, and objective inquiry, and minimizes the need forpotentially costly additional evidentiary proceedings.").

454. Id.455. Carragher, supra note 441, at 26.456. Michael L. Cook, Preface to 1 UNDERSTANDING THE BASICS OF BANKRUPTCY &

REORGANIZATION 2004, at 27, 40 (Lewis Kruger ed., 2004). "Causing the lender to bear [theevidentiary] burden in a consumer bankruptcy case... is quite different from requiring the lender tobear it in the business reorganization context." Id.

457. See Carragher, supra note 441, at 26; see also Greenspan & Nelson, supra note 288, at 48(recognizing that Till may not apply to complex Chapter 11 cases that involve businesses rather thanindividuals); Clyde Mitchell, High Court Takes Interest in 'Cramming Down' Banks, N.Y.L.J., July

14, 2004, at 3 ("Till involved a consumer debtor, and thus, the case may be limited to its uniquefacts.").

458. Dennis J. Connolly, High Court Cram-Down Decision Will Have Big Impact: The PluralityOpinion in 'Till' Will Have Economic Effects on Lenders, Creditors, NAT'L L.J., Aug. 9, 2004, at 20.

459. See In re Am. Homepatient, Inc., Nos. 03-6500/03-6501, 2005 U.S. App. LEXIS 17203 (6th

Cir. 2005); In re Prussia Assocs., 322 B.R. 572 (Bankr. E.D. Pa. 2005).

the use of the 'formula' approach described in Till in every Chapter 1 1case." 460 Although one of these courts did apply the formula approach to theChapter 11 case, it stated that Till was merely a fallback and not bindingauthority in all Chapter 11 cases.461

D. What Does Till Mean for the Average Consumer Filing for Chapter 13Relief?

While there may be some uncertainty as to whether Till should apply toChapter 11, the plurality's formula rate approach will most likely be used bybankruptcy courts in the Chapter 13 context.462 This will affect the Chapter13 debtor in two ways. First, in the words of Justice Stevens, debtors nowhave a "straightforward, familiar, and objective inquiry., 463 All debtorsneed to do is set the cram down rate at prime and then adjust it for risk.4 4

While disputes could arise as to the proper risk adjustment,465 as long asdebtors add 1% to 3% to the prime rate their chances of confirmation arevery good.466 In any case, "Till gives debtors extra leverage by placing theburden on the secured creditor to demonstrate what the risk premium for acram-down loan should be. 467

Second, setting the cram down interest at the low prime-plus-risk rate islikely to save debtors millions in finance charges every year.468 Thesesavings, in turn, will make the debtors' repayment plans more manageableand will provide more money to pay unsecured creditors.469

E. What Does Till Mean for the Sub-Prime Lending Markets?

While Till presents significant advantages to the Chapter 13 debtor, thecase is likely to have a detrimental effect on the sub-prime lending marketsas a whole.47 ° For example, because Till allows debtors to deprive sub-prime lenders of their initial high contract rates, these lenders will have to

460. In re Am. Homepatient, Inc., 2005 U.S. App. LEXIS 17203, at *19 (citing In re PrussiaAssocs., 322 B.R. at 585).

461. In re Prussia Assocs. 322 B.R. at 590.462. See Rankinand & Alliotts, supra note 428, at 13; Yerbich, supra note 419, at 10; see also

supra Part VII.B (explaining how all post-Till bankruptcy court decisions dealing with the properChapter 13 cram down rate have applied the formula approach).

463. Till v. SCS Credit Corp., 541 U.S. 465, 479 (2004) (plurality opinion).464. Id.465. See Dan Schechter, Supreme Court Approves "Formula Approach" to Cramdown Interest;

Ruling Will Affect Subprime Market and May Affect Commercial Finance, Com. Fin. News, May 24,2004, at 36.

466. Yerbich, supra note 419, at 59.467. Douglas, supra note 286.468. James J. Haller, What Till v. SCS Credit Corp. Means for Your Chapter 13 Clients, 92 Ill.

B.J. 478, 480 (2004) (estimating that as a result of the lower interest rates presented by the formularate method Chapter 13 debtors will save over $335 million per year nationwide).

469. Id.470. See Connolly, supra note 458, at 20; Douglas, supra note 286; Schechter, supra note 465, at

36.

180


turn to other methods of making profits.47 This, in turn, may force creditorsto charge higher up-front fees and increase their sub-prime interest ratesacross the board.472 Thus, in the words of one commentator, these "othermeans of extracting value.., can only mean bad news for the nation'sriskiest borrowers. 473

F. How Will the Bankruptcy Abuse Prevention and Consumer ProtectionAct of 2005 Affect Chapter 13 Filings?

On April 20, 2005, President Bush signed the Bankruptcy AbusePrevention and Consumer Protection Act of 2005. 47 4 Aimed at those who"walk[] away from debts even when they [have] the ability to repaythem,, 475 the 2005 Act makes it more difficult to file for liquidation underChapter 7 and forces more debtors to turn to repayment plans under Chapter13. 476

This reform is accomplished through a more stringent qualification testfor those seeking Chapter 7 relief.477 Prior to the 2005 Act, if it wasdetermined that the debtor abused Code provisions, the case would bedismissed. 478 This abuse included unreasonable delays by the debtor,nonpayment of fees or charges, and the failure to file certain documentsrequired by the bankruptcy court. 4 79 The 2005 Act, however, amendedChapter 7 to include an additional presumption of abuse that can arise if thedebtor fails a two-part test.480 Under this test, the first level of inquiry iswhether the debtor's annual income falls below the median family income ofthose who reside in the applicable state.4 81 If the debtor is below the state

471. Douglas, supra note 286; see also Connolly, supra note 458, at 21 ("[I]nvestors will requiremore of a cushion to address bankruptcy issues.").

472. Douglas, supra note 286 ("[Till's repercussions] could entail higher front-end fees, evenhigher interest rates"); Schechter, supra note 465, at 36 ("[L]enders will have to 'frontload' [cramdown] risk by building it into every borrower's interest rates.").473. Douglas, supra note 286.474. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119

Stat. 23, § 102 (g) (to be codified at 11 U.S.C. § 1325(a)(7)); Nedra Pickier, Bush Signs Big Rewriteof Bankruptcy Law, ASSOCIATED PRESS NEWSWiRES, April 20, 2005, available athttp://abcnews.go.com/Politics/WireStory?id=688026.475. Press Release, The White House, President Bush Signs Bankruptcy Abuse Prevention,

Consumer Protection Act (April 20, 2005),http://www.whitehouse.gov/news/releases/2005/04/20050420-5.html [hereinafter White House PressRelease].476. Jeanne Sahadi, President Signs Bankruptcy Bill (April 20, 2005),

http://money.cnn.com/2005/04/20/pf/bankruptcy-.bill/.477. See id.478. See II U.S.C. § 707 (2000).479. See 1 U.S.C. § 707(a).480. See Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8,

119 Stat. 23, § 102(a)(2)(C) (to be codified at 11 U.S.C. §§ 707(b)(2)(A), (b)(6)-(7)).481. See id. § 102(a)(2)(C) (to be codified at 11 U.S.C. § 707(b)(6)-(7)).

median income, then the presumption of abuse will not arise and thatindividual may still qualify for Chapter 7 relief.482 If the debtor is above themedian income, however, then the individual is subjected to a second levelof inquiry to determine whether or not he or she can afford to repaydebtors.483

Under this second level, the debtor must pass a means test whichinvolves a calculation of monthly income. First, the debtor's monthlyearnings are reduced by necessary living expenses as determined by InternalRevenue Service (IRS) standards.484 The reduced monthly income is thenmultiplied by sixty months.485 To avoid a presumption of abuse, this totalamount must be less than the lesser of (i) $10,000 or (ii) 25% of unsecuredclaims, or $6,000, whichever is greater.4 86 If the debtor fails this second test,then a presumption of abuse arises which prohibits the debtor from filing forliquidation under Chapter 7.487

Thus, the new legislation-which is set to take affect on October 17,2005 4 88 -"will help ensure that debtors make a good-faith effort to repay asmuch as they can afford., 489 Consequently, the Act will force moreindividuals to file for repayment plans under Chapter 13.490 Because of thisanticipated increase in consumer debt adjustment filing, it follows that moresecured creditors will be subjected to the cram down provision of Chapter 13and the holding of Till.

VIII. CONCLUSION

In Till, the Supreme Court sought to bring clarity to the "murky waters"that are the Bankruptcy Code's cram down provisions.49' Despite thesegood intentions, the Court's decision may have brought more confusion tothe issue.4 92 On one hand, Till has provided a guide from which debtors canmodel their repayment plans, creditors can strategize, and bankruptcy courtscan follow. 4 93 Indeed, bankruptcy cases subsequent to the Court's decision

482. See id.483. See id.484. Id. § 102(a)(2)(C) (to be codified at 11 U.S.C. § 707(b)(2)(A)(i)).485. Id.486. Id. For example, assume that Debtor's reduced monthly income over sixty months totals

$5,900 and 25% of his unsecured claims equals $5,000. Although the $5,000 is less than $10,000,Debtor's reduced income will be compared with $6,000 because it is greater than 25% of hisunsecured debts. In this case, Debtor avoids the presumption of abuse because his reduced income isless than the $6,000 minimum. As a further example, assume that Debtor's reduced monthly incometotal now amounts to $9,900 and 25% of his unsecured claims equals $15,000. Because theunsecured claim percentage is greater than $10,000, the $10,000 number controls. In this instance,Debtor may also avoid the presumption of abuse because his reduced income is less than $10,000.

487. See id.488. Epstein, supra note 88, at B7.489. White House Press Release, supra note 475.490. Sahadi, supra note 476.491. See Connolly, supra note 458, at 20.492. Goodrich, supra note 451, at 1.493. See Yerbich, supra note 419, at 59.


have adopted and applied the plurality's formula rate method.494 On theother hand, the lack of a majority opinion severely limits Till's applicationbeyond Chapter 13 proceedings. 495 Because of its narrow scope and asolitary footnote in the plurality opinion, commentators are left to wonderhow or if Till will apply in the Chapter 11 context of commercialreorganization.496 Certainly, "the decision leaves significant uncertainty inthe area of valuation of deferred payment streams. 497

In short, Till leaves us with three questions: Is Till the last word on theproper method for computing cram down rates? Will the plurality's formularate approach apply to Chapter 11 bankruptcy cases? Will Congress amendthe Code and provide us with its intended meaning of the words "value, as ofthe effective date of the plan?" Only time can answer these questions.

Phillip J. Giese49 8

494. See supra Part VII.B.495. See Marks v. United States, 430 U.S. 188, 193 (1977) ("[W]hen a fragmented Court decides

a case and no single rationale explaining the result enjoys the assent of five Justices, 'the holding ofthe Court may be viewed as that position taken by those Members who concurred in the judgmentson the narrowest grounds.."') (citing Gregg v. Georgia, 428 U.S. 153, 169 n.15 (1976)).

496. See discussion supra Part VII.C.497. Connolly, supra note 458, at 21.498. J.D. Candidate, Pepperdine University School of Law, May 2006; B.A., Walla Walla

College. For their constant love and support, I would like to thank my parents John and ElizabethGiese, and my siblings and best friends Adeline, Kristine, and Jonathan.

till v. scs credit corp.: can you 'till' me how to cram

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